............... 120 I. That the sale or exchange of the David Berwind Trust's BPSI common stock occurred on December 16, 1999, is not inconsistent with Megargel v. Commissioner, 3 T.C. 238 (1944), and cases following it
Nor does the fact that the suit ended in a compromise settlement change the nature of the recovery; "the determining factor is the nature of the basic claim from which the compromised amount was realized." Paul Selected Studies in Federal Taxation, Second Series, pp. 328-9, footnote 76; Helvering v. Safe Deposit Trust Co. of Baltimore, 1941, 316 U.S. 56, 62 S.Ct. 925, 86 L.Ed. 1266, 139 A.L.R. 1513; Lyeth v. Hoey, 1938, 305 U.S. 188, 59 S.Ct. 155, 83 L.Ed. 119, 119 A.L.R. 410; Central R. of New Jersey v. Commissioner, supra; Farmers' Merchants' Bank v. Commissioner, supra; Megargel v. Commissioner, 1944, 3 T.C. 238. But, to say that the recovery represents a return of capital in that it takes the place of the business good will is not to conclude that it may not contain a taxable benefit.
This distinction has been adopted in a number of decisions. See Helvering v. Stormfeltz, 8 Cir., 142 F.2d 982; Garrett v. Crenshaw, 4 Cir., 196 F.2d 185; Megargel v. Commissioner, 3 T.C. 238. Were these fees incurred for the "recovery of property"?
The parties are in agreement that the proper test to be applied in cases of this kind is that the tax character of the settlement proceeds is determined by the nature of the claims involved and the basis of the recovery. Lyeth v. Hoey, 305 U.S. 188 (1938); Freeman v. Commissioner, 33 T.C. 323 (1959); Booker v. Commissioner, 27 T.C. 932 (1957); Megargel v. Commissioner, 3 T.C. 238 (1944); Raytheon Production Corp. v. Commissioner, 1 T.C. 952 (1943), affd. 144 F.2d 110 (1st Cir. 1944), cert. denied 323 U.S. 779 (1944). Petitioners brought suit to recover $2 million in compensatory damages and $2 million in punitive damages based upon grounds of breach of contract and intentional interference with TCI's business.
We think he was correct in doing so. It was said by this Court in Margery K. Megargel, 3 T.C. 238, 243 (1944), that the ‘nature and basis of the action show the nature and character of the consideration received upon compromise. Lyeth v. Hoey, 305 U.S. 188.’ Measured by that standard, we think that what petitioner in the present case received in compromise or settlement of his claims for breach of his employment contract must be held to be compensatory, and fully taxable as ordinary income.
The taxability of the settlement is controlled by the nature of the litigation. Raytheon Production Corp. v. Commissioner, 144 F.2d 110, 114 (C.A. 1, 1944), affirming 1 T.C. 952 (1943), certiorari denied 323 U.S. 779 (1944); Margery K. Megargel, 3 T.C. 238 (1944); Sarah A. Young, 16 T.C. 1424 (1951); I. C. Bradbury, 23 B.T.A. 1352 (1931), affirmed sub nom. Commissioner v. Timmer, 78 F.2d 599 (C.A. 6, 1935).
The taxability of the settlement is controlled by the nature of the litigation. Raytheon Production Corp. v. Commissioner, 114 F.2d 110, 114 (C.A. 1, 1944), affirming 1 T.C. 952 (1943), certiorari denied 323 U.S. 779 (1944); Margery K. Megargel, 3 T.C. 238 (1944); Sarah A. Young, 16 T.C. 1424 (1951); I. C. Bradbury, 23 B.T.A. 1352 (1931), affirmed sub nom. Commissioner v. Timmer, 78 F.2d 599 (C.A. 6, 1935).
Ripley Realty Co., supra. As we are concerned with whether gain realized in a prior year may be limited by the events of a subsequent year, rather than with the characterization of amounts received in the year of settlement of litigation, Margery K. Megargel, 3 T.C. 238 (1944), and Albert J. Goldsmith, 22 T.C. 1137 (1954), relied on by the petitioner are inapplicable. If an inequity exists, it is the inability of the petitioner to carry back his 1962 and 1963 losses and apply those losses against his 1960 gain, a result that can be changed only by the Congress.
It is sufficient (and respondent does not argue otherwise) if the taxpayer may realize income in a subsequent taxable year and this is so even where such future income is nonrecurring and involves only gains from the disposition of property. Sec. 1.212-1(b), Income Tax Regs.; see e.g., Margery K. Megargel, 3 T.C. 238, 250 (1944). Nevertheless, if a particular expenditure is ‘capital’ in nature, section 212 will not apply, and the taxpayer must await the sale of the particular asset involved before the expenditures are recognized for tax purposes.
The taxable character to the recipients of the payments made by such defendants are not altered by virtue of such characterizations. Albert J. Goldsmith, 22 T.C. 1137(1954), acq. 1955-1 C.B. 4; cf., Margery K. Megargel, 3 T.C. 238(1944) acq. 1944 C.B. 19. Possibly the Countess considered the Marco litigation to have only nuisance value, but the money she paid was paid to eliminate the claim on which the supposed nuisance rested.