COMMISSIONER VS. GLENSHAW GLASS- Income From Whatever Source

Category: Income Taxation

“Income from whatever source” includes award of damages received by a winning party in a case.

FACTS:

• Glenshaw manufactures glass bottles and containers. Hatford- Empire company manufactures the machines used by Glenshaw.

• Glenshaw sued Hatford-Empire. His claims were demands for exemplary damages for fraud and treble damages for injury to its business by reason of Hartford’s violation of the federal antitrust laws. They had a settlement wherein Hartford paid Glenshaw $800,000. Of this amount, around $324k, which was for punitive damages for fraud and antitrust violations, was not reported by Glenshaw as income.

• The Commissioner determined a deficiency, claiming as taxable the entire sum less only deductible legal fees. The Tax Court and the Court of Appeals ruled for Glenshaw.

ISSUE: Whether or not the award for damages falls under “income derived from whatever source,” thus taxable

HELD: YES.

• US Tax Code: SEC. 22. GROSS INCOME.
"(a) GENERAL DEFINITION. 'Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service . . . of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. . . ."

• Here, we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients. Respondents concede, as they must, that the recoveries are taxable to the extent that they compensate for damages actually incurred. It would be an anomaly that could not be justified in the absence of clear congressional intent to say that a recovery for actual damages is taxable, but not the additional amount extracted as punishment for the same conduct which caused the injury. And we find no such evidence of intent to exempt these payments.