SCOTUS Reports

Tag: Antitrust Law

  • McDermott, Inc. v. Commissioner, 93 T.C. 217 (1989): Deductibility of Settlement Payments Under Section 162(g) of the Internal Revenue Code

    McDermott, Inc. v. Commissioner, 93 T. C. 217 (1989)

    Settlement payments under the Clayton Act are subject to the limitations of section 162(g) of the Internal Revenue Code if they are ‘on account of’ the same conduct admitted in a related criminal antitrust proceeding.

    Summary

    McDermott, Inc. faced a tax dispute over the deductibility of settlement payments made to plaintiffs in a consolidated Clayton Act antitrust litigation following its nolo contendere plea to Sherman Act violations. The Tax Court held that payments related to bid-rigging contracts, both targeted and nontargeted, were subject to section 162(g)’s limitation, disallowing deductions for two-thirds of such payments. However, payments related to negotiated contracts were fully deductible under section 162(a). The decision hinged on the interpretation of ‘on account of such violation’ in section 162(g), focusing on whether the civil settlements were essentially coextensive with the criminal conduct admitted.

    Facts

    McDermott, Inc. , a marine construction company, was indicted alongside Brown & Root, Inc. , for bid rigging and other anticompetitive practices in violation of the Sherman Act. Following a plea agreement, McDermott pleaded nolo contendere to these charges. Subsequently, over 60 companies initiated Clayton Act lawsuits against McDermott for treble damages. McDermott settled these claims using a formula based on the type of contract involved: targeted bid contracts, nontargeted bid contracts, and negotiated contracts. The settlements amounted to $93,959,034, with different rates applied to each contract type. McDermott sought to deduct these payments under section 162(a) of the Internal Revenue Code, but the Commissioner challenged the deductibility under section 162(g).

    Procedural History

    McDermott and the Commissioner filed cross-motions for partial summary judgment in the U. S. Tax Court regarding the deductibility of the settlement payments. The court needed to determine whether these payments were subject to the limitations of section 162(g) due to McDermott’s nolo contendere plea in the criminal antitrust case.

    Issue(s)

    1. Whether payments made to settle claims related to targeted bid contracts are deductible under section 162(g)?
    2. Whether payments made to settle claims related to nontargeted bid contracts are deductible under section 162(g)?
    3. Whether payments made to settle claims related to negotiated contracts are deductible under section 162(g)?

    Holding

    1. No, because the payments were ‘on account of’ the Sherman Act violation admitted in the criminal proceeding.
    2. No, because the nontargeted bid contract settlements were essentially coextensive with the conduct admitted in the criminal proceeding.
    3. Yes, because the negotiated contract settlements were not coextensive with the admitted criminal conduct.

    Court’s Reasoning

    The court interpreted ‘on account of such violation’ in section 162(g) to mean that the civil settlements must be essentially coextensive with the criminal conduct admitted. McDermott’s plea focused on bid rigging, which encompassed both targeted and nontargeted bid contracts, thus subjecting payments for these settlements to section 162(g). The court emphasized the origin and nature of the claims, not McDermott’s settlement motives, in determining the applicability of section 162(g). For negotiated contracts, the court found that the admitted criminal conduct did not extend to these, as the plea did not cover negotiated agreements, allowing full deductions under section 162(a). The court referenced Flintkote Co. v. United States and Federal Paper Board Co. v. Commissioner to support its analysis.

    Practical Implications

    This decision impacts how antitrust litigation settlements are treated for tax purposes. Companies facing antitrust allegations must carefully consider the scope of their criminal pleas to avoid unintended tax consequences in related civil settlements. The ruling clarifies that only settlements directly related to the criminal conduct admitted will be subject to section 162(g), potentially affecting settlement strategies in antitrust cases. Later cases, such as those involving similar issues of deductibility, will need to consider this ruling when determining the applicability of section 162(g). Additionally, this case underscores the importance of distinguishing between different types of contracts in antitrust litigation and their tax treatment.

  • Fisher Co.’s, Inc. v. Commissioner, 88 T.C. 1322 (1987): Deductibility of Antitrust Settlement Payments and Leasehold Obligations in Tax Law

    Fisher Co. ‘s, Inc. v. Commissioner, 88 T. C. 1322 (1987)

    The two-thirds disallowance of antitrust settlement payments under IRC § 162(g) applies only to payments made after a civil action is filed and for violations within the period of criminal conviction or related violations if an injunction was obtained.

    Summary

    In Fisher Co. ‘s, Inc. v. Commissioner, the court addressed the tax deductibility of payments made by Fisher Mills to settle antitrust claims and the tax implications of a leasehold obligation’s assumption in an asset sale. The court ruled that the two-thirds disallowance under IRC § 162(g) applied to payments for violations during the period of criminal conviction but not to pre-litigation settlements or periods outside the conviction. Additionally, the court held that the assumption of a leasehold obligation by a buyer increased the seller’s amount realized upon asset sale. This case clarifies the scope of the tax disallowance for antitrust settlements and the tax treatment of leasehold obligations in asset transactions.

    Facts

    Fisher Mills, a subsidiary of Fisher Co. ‘s, Inc. , was convicted of antitrust violations for the period from August 15, 1967, to December 31, 1969, following a nolo contendere plea. Subsequently, Fisher Mills settled civil antitrust claims with American Bakeries and Interstate Brands Corp. for violations alleged over a longer period. The settlement with ITT Continental Baking Co. occurred before any civil action was filed. Additionally, Fisher Services, Inc. sold assets to Golden Grain Macaroni Co. , which assumed a $500,000 leasehold obligation to repair a roof.

    Procedural History

    The IRS issued a notice of deficiency for Fisher Co. ‘s, Inc. ‘s 1977 and 1979 tax years, disallowing certain deductions related to antitrust settlement payments and adjusting the income from the asset sale. Fisher Co. ‘s, Inc. petitioned the Tax Court to contest these adjustments.

    Issue(s)

    1. Whether the two-thirds disallowance under IRC § 162(g) applies to limit the deduction of payments made by Fisher Mills to American Bakeries and Interstate for antitrust violations after a criminal conviction but before an injunction was obtained?
    2. Whether the two-thirds disallowance under IRC § 162(g) applies to limit the deduction of payments made by Fisher Mills to ITT before the commencement of any civil action under the Clayton Act?
    3. Whether the purchase price received by Societe Candy Co. from the sale of its assets to Golden Grain Macaroni Co. included $500,000 for the assumption of Societe’s leasehold obligation to repair the roof?

    Holding

    1. Yes, because the payments were made in settlement of a civil action under the Clayton Act, but the disallowance only applies to the period of the criminal conviction (August 15, 1967, to December 31, 1969) since no injunction was obtained.
    2. No, because the payments were made before any civil action was filed, and thus do not fall within the scope of IRC § 162(g).
    3. Yes, because the assumption of the leasehold obligation by Golden Grain constituted income to Societe Candy Co. , increasing the amount realized from the asset sale by $500,000.

    Court’s Reasoning

    The court’s decision was based on the statutory language and regulations of IRC § 162(g), which limits the disallowance to payments made after a civil action is filed under the Clayton Act. The court emphasized that the disallowance applies only to the period of the criminal conviction or related violations if an injunction was obtained, as defined in the regulations. The court rejected the IRS’s broader “economic objective” test for defining related violations. For the ITT settlement, the court held that since no civil action was filed, the payments were fully deductible. Regarding the leasehold obligation, the court applied the principle that the discharge of a liability by another party constitutes income to the beneficiary, referencing cases like United States v. Hendler.

    Practical Implications

    This decision provides clarity on the deductibility of antitrust settlement payments, emphasizing the necessity of a filed civil action and the specific period of criminal conviction for the two-thirds disallowance to apply. It encourages pre-litigation settlements by allowing full deductions for such agreements. For tax practitioners, this case underscores the importance of distinguishing between settlement payments for different periods and the necessity of an injunction for extending disallowance to related violations. In terms of leasehold obligations, the case confirms that the assumption of such obligations by a buyer in an asset sale increases the seller’s taxable income, impacting how such transactions are structured and reported for tax purposes. Later cases have referenced this decision when addressing similar issues of tax deductibility and the treatment of leasehold obligations in asset sales.

  • R. J. Durkee v. Commissioner, 6 T.C. 773 (1946): Taxability of Settlement Proceeds in Anti-Trust Suit

    6 T.C. 773 (1946)

    Settlement proceeds from a lawsuit are taxable as income under Section 22(a) of the Internal Revenue Code unless the taxpayer can demonstrate that the proceeds represent a non-taxable return of capital, such as for damage to goodwill, and allocate the settlement amount accordingly.

    Summary

    R.J. Durkee sued a group of electrical contractors for conspiracy to restrain trade, alleging lost profits and destruction of business goodwill. The case was settled for $25,000, and Durkee, after deducting attorney’s fees and court costs, reported the net amount of $19,439.95 on his tax return but argued it was not taxable. The Tax Court upheld the Commissioner’s determination that the settlement was taxable income because Durkee failed to prove what portion of the settlement was for non-taxable capital recovery (e.g., goodwill) versus taxable lost profits or punitive damages. The court emphasized the lack of evidence allowing allocation among the various potential elements of recovery.

    Facts

    R.J. Durkee, an electrical contractor, sued 30 other contractors, alleging they conspired to restrain trade from 1928 to 1939 by fixing prices, maintaining a quota system, and coercing architects and builders against him. Durkee claimed this conspiracy destroyed his business goodwill and deprived him of income. He sought $300,000 in damages, based on an Ohio statute allowing for double damages in antitrust cases. The suit was settled in 1941 for $25,000, with Durkee signing a release discharging the defendants from all claims, including those asserted in the lawsuit. Durkee reported the net settlement amount on his tax return but argued it was non-taxable.

    Procedural History

    Durkee filed suit in the Court of Common Pleas, Cuyahoga County, Ohio. After an amended petition and general denials by the defendants, the case was settled before trial. The Commissioner of Internal Revenue determined the settlement proceeds were taxable income and assessed a deficiency. Durkee petitioned the Tax Court for redetermination of the deficiency.

    Issue(s)

    1. Whether the settlement proceeds received by Durkee in the antitrust lawsuit are taxable income under Section 22(a) of the Internal Revenue Code.

    Holding

    1. No, because Durkee failed to demonstrate that the settlement represented a non-taxable return of capital (e.g., for damage to goodwill) and failed to provide a basis for allocating the settlement amount among different potential elements of recovery (e.g., lost profits, damage to goodwill, punitive damages).

    Court’s Reasoning

    The court reasoned that the Commissioner’s determination of taxability is presumed correct, and the taxpayer bears the burden of proving otherwise. The court acknowledged that if the settlement were demonstrably for the destruction of goodwill, it would be a non-taxable return of capital (to the extent of its basis). However, the court found it impossible to allocate the settlement amount between lost profits (taxable income) and damage to goodwill (potential capital recovery) based on the record. The court noted the amended petition alleged both loss of profits and damage to goodwill, but there was no basis for dividing the settlement between the two. Further, the release covered claims not only of Durkee individually, but also of a dissolved partnership and a corporation, further obscuring the nature of the recovery. The court cited Raytheon Production Corporation, where a similar lack of allocation led to the entire settlement being treated as taxable income. The court distinguished Highland Farms, where a clear division existed between punitive and remedial elements of recovery, allowing for exclusion of punitive damages from taxable income. The court stated: “If the amount received in settlement of such an action had been shown to be received for the good will of petitioner’s business, it would, above its basis, be a capital recovery, and he would not be taxable. But clearly, it is impossible for us so to state, under the facts of record here.”

    Practical Implications

    This case underscores the critical importance of carefully documenting and allocating settlement proceeds to specific types of damages. Taxpayers seeking to treat settlement proceeds as a non-taxable return of capital must provide clear evidence supporting that characterization. Settlement agreements should explicitly allocate portions of the settlement to specific claims, such as damage to goodwill or capital assets, and evidence should be maintained to support the allocation. The Durkee case highlights the risk of unfavorable tax treatment when a settlement agreement is broadly worded and lacks specific allocation, especially when multiple plaintiffs or types of claims are involved. Later cases cite Durkee for the principle that the taxpayer bears the burden of proving the nature of settlement proceeds for tax purposes.