Farmers & Merchants Bank v. Commissioner , 20 B.T.A. 622 ( 1930 )

FARMERS & MERCHANTS BANK OF CATLETTSBURG, KY., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Farmers & Merchants Bank v. Commissioner

Docket No. 38791.

United States Board of Tax Appeals

20 B.T.A. 622; 1930 BTA LEXIS 2076;

August 27, 1930, Promulgated

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Money received by petitioner in settlement of litigation held, under the evidence, to be taxable income.

Chester A. Bennett, Esq., and George B. Martin, Esq., for the petitioner.

T. M. Mather, Esq., for the respondent.

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MARQUETTE

This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent in the amount of $1,679.74 for the year 1925. The only question is whether the amount received by the petitioner in settlement of an action for damages brought by it against the Federal Reserve Bank of Cleveland, Ohio, is taxable income.

FINDINGS OF FACT.

The petitioner is and has been for many years a corporation organized under the laws of the State of Kentucky, and engaged in the general banking business at Catlettsburg, Ky. It is and was during the years 1920 to 1925, inclusive, located within the district of the Federal Reserve Bank of Cleveland, Ohio.

It has been the custom of the petitioner from the date of its organization, and was its custom in 1920, to make a charge of one-tenth of 1 per cent for the collection of all checks on foreign banks and on all checks drawn on it and sent for collection by other banks. The petitioner was not a member of the Federal Reserve Bank system and checks drawn on it were not cleared through the Federal Reserve Bank, as that bank only handled checks drawn on member banks, but were sent direct to the petitioner by the holding bank and were paid by the petitioner to the holding bank by drafts drawn on Cincinnati or New York.

In 1920 the Federal Reserve Bank of Cleveland undertook to enforce throughout its district clearance at par of all checks that might fall into its hands. The petitioner refused to adopt this policy, one of the reasons being that collection of exchange constituted one of its sources of income. The Federal Reserve Bank, after making several demands that the petitioner sign an agreement to clear checks at par, and the petitioner having refused, announced its determination to force or coerce the petitioner to adopt that policy, and notified its member banks that it would collect, without charge, all checks drawn on the petitioner that might be sent to it. It first undertook to collect such checks through the agent of the American Express Co. at Catlettsburg in the following manner: Each day checks drawn on the petitioner that had come into the possession of the Federal Reserve Bank were sent to said agent, who presented them to the petitioner and demanded and received payment in cash, which he shipped to the Federal Reserve Bank's branch in Cincinnati. This procedure lasted for about ten days or two weeks, and at the end of that time the agent of the express company refused further to handle checks sent to him. Upon the refusal of the agent of the express company to continue to present for and demand payment on checks drawn on the petitioner, and sent to him by the Federal Reserve Bank of Cleveland, that bank employed other persons in Catlettsburg to act for it. It first employed a man, one Barbee, for two or three weeks, and then a Miss McCall, who continued to be so employed for about eighteen months. These employees, at the instance and direction of the Federal Reserve Bank of Cleveland, presented for and demanded and received payment on checks drawn on the petitioner in such a manner as to annoy, embarrass and interfere with the petitioner in the conduct of its business and injure its reputation and standing in the community and among its customers and depositors, and to reduce its earning power and cause it to fail to earn money that it otherwise would have earned.

In October, 1922, the petitioner was granted an injunction by the United States District Court for the Eastern District of Kentucky, restraining the Federal Reserve Bank of Cleveland, and its agents, "from continuing so to make collections of checks drawn on plaintiff and the defendant bank from advertising that it will collect such checks free of charge and from doing anything else for the purpose of coercing plaintiff to remit at par."

Subsequently, the petitioner brought an action against the Federal Reserve Bank of Cleveland in the United States District Court for the Northern District of Ohio to recover damages claimed to have been sustained by it on account of the acts of the said Federal Reserve Bank in connection with the collection of checks on the petitioner as above set forth. The petition in said action is in part as follows:

The plaintiff says that the agents and representatives, directors and advisers of the defendant have at all times herein mentioned been selected from the most able and learned, experienced and capable bankers and lawyers of the United States, and well and fully knew the full extent of their every act herein complained of by the plaintiff; that all of the said acts hereinbefore set forth were mischieviously, maliciously, wilfully, intentionally, and wantonly done by the defendant with the intent on the part of the defendant to injure the business of the plaintiff, and with the further intent on the part of the defendant of completely destroying the business of the plaintiff if the plaintiff would not accede to the illegal demand of the defendant, whereby the defendant demanded that the plaintiff perform for the defendant services hereinbefore set forth without compensation;

That by reason of the acts and conduct of the defendant aforesaid, the plaintiff has been damaged and injured, in that it has been forced to procure unnecessarily and unusually large quantities of currency and money at a large expense; it has been required to keep a large amount of reserve in cash in its vaults for a period of more than eighteen months, and also larger amounts of money with its correspondent banks than it would otherwise be required to keep; that it has lost the earning power of a great deal of money; has lost many old and good accounts of depositors; has been unable to develop new business; has suffered much annoyance, embarrassment, worry and expense in the conduct of its business and affairs; has lost many thousands of dollars of deposits from new and old depositors that would otherwise have been deposited with it; has failed to continue with the growth of its business; has greatly suffered and been damaged in its reputation and financial standing in the community in which it does business, and throughout the United States generally has been grossly and permanently injured, and the reputation and financial standing of the plaintiff bank, generally, has been lost to it, and that many depositors have withdrawn their accounts from the custody and business control of the plaintiff; that new depositors have refrained from opening accounts and depositing their money with the plaintiff; and that the growth and prosperity of the plaintiff's banking business has been permanently injured by reason of the acts aforesaid so committed by the defendant and its agents and duly authorized representatives, in the sum of Fifty Thousand ($50,000.00) Dollars.

The plaintiff further says that all of the acts and conduct hereinbefore complained of and so committed by the defendant, its agents and duly authorized representatives, were committed as hereinbefore alleged with malice, knowledge and intent on the part of the defendant, and with the intent and desire to oppress, hinder, embarrass, annoy, injure and coerce the plaintiff; that the defendant bank was created under said Reserve Act, with resources of many millions of dollars for the purpose of "affording and furnishing a more elastic currency and more practical means of rediscounting commercial paper"; that the defendant has wilfully and intentionally perverted its functions as a federal reserve banking institution; has violated the trust and confidence of the people of the United States, and has used and exerted its enormous power, resources and influence which the people of the United States have entrusted and invested with it for the malicious and wilful intent of injuring and destroying the banking business of the plaintiff; and with the malicious and oppressive intent of destroying the plaintiff's said banking business; that the defendant should be punished by reason of the malicious, wilful, intentional and wanton character of the acts and conduct aforesaid, all of which were and are prompted by the bad motive as hereinbefore set forth, and in complete and utter disregard of its social and legal obligations, and likewise in disregard of the legal and lawful rights of the plaintiff; and that by reason thereof the plaintiff is entitled to exemplary damages against the defendant in the further sum of One Hundred Thousand Dollars ($100,000.00).

WHEREFORE, the plaintiff, FARMERS & MERCHANTS BANK, of Catlettsburg, Kentucky, prays for a judgment against the defendant, FEDERAL RESERVE BANK of Cleveland, in the sum of One Hundred and Fifty Thousand Dollars ($150,000.00) for its costs herein expended, and for any and all other relief to which it may appear to be entitled, either at law or in equity, as well as its costs herein expended.

Said action was settled by a compromise agreement in 1925, by which the Federal Reserve Bank of Cleveland paid to the petitioner $18,750. The expenses of the action paid by the petitioner reduced the net amount received by it to $13,792.96. The respondent included the said net amount of $13,792.96 in petitioner's income for 1925.

OPINION.

MARQUETTE: The evidence herein establishes that in 1920 and 1921 the petitioner was embarrassed, harassed, annoyed, and interfered with by the Federal Reserve Bank of Cleveland, Ohio, with the result that its reputation and standing in Catlettsburg, Ky., and vicinity, and among its customers and depositors were injured, its earning power was crippled, and its earnings less than they otherwise would have been. The petitioner brought an action against the Federal Reserve Bank for the wrongful acts of the latter and asked for $50,000 actual and $100,000 exemplary or punitive damages. The action was settled by payment to the petitioner of $18,500 in satisfaction of its claim, out of which the petitioner paid costs and expenses of the suit. The net proceeds, amounting to $13,792.96, have been included by the respondent in the petitioner's income for 1925, the year in which the compromise was effected and the money paid. The petitioner contends that no part of this amount constitutes income, but was paid to compensate for injuries done to the petitioner, the effect of the payment being to place the petitioner in the same position as it was before the wrongful or unlawful acts were committed by the Federal Reserve Bank.

The petitioner's contention would be well taken if the facts were that the entire amount paid to it merely placed it in the position it occupied before the controversy with the Federal Reserve Bank began. But upon the record we are unable to find that such is the case. The only witness for the petitioner, its cashier, testified that, due to the acts of the Federal Reserve Bank, the petitioner's reputation was damaged, and its earnings were reduced. But he did not state whether the damage to the petitioner's reputation was reflected over a period of time in its business and earnings, or ceased upon the termination of the wrongful acts of the Reserve Bank and the settlement of the controversy. It is clear, however, that part of the damage done by the Reserve Bank was reflected in the petitioner's earnings during the period that the coercive methods were being used. In other words, the petitioner earned in that period less money than it would have earned had it not been for the action of the Reserve Bank, and the settlement must be construed, in part at least, as compensating the petitioner for that loss of earnings. While we are not unmindful of the cases cited by the petitioner, we are unable to conclude that where one person or corporation pays to another person or corporation an amount of money that the latter would have earned had it not been for wrongful acts of the former, the amount so paid is not income to the latter. It would have been income if the latter person or corporation had earned it, and we think that where the payment is made, the payee is in the same position, as far as the increase in capital is concerned, as if it had actually earned the money. Its income is the same in both instances. We are therefore of the opinion that at least part of the amount in question was clearly income to the petitioner.

The respondent has included the entire amount of the settlement in the petitioner's income for 1925. The burden is on the petitioner to show that the respondent's action is erroneous. We are of opinion that it has failed to meet that burden. The record fails to show that there was damage done to the petitioner's reputation and business other than that reflected in reduced earnings for the period of the coercive acts of the Federal Reserve Bank. However, assuming that such damage did occur, we are unable to determine from the evidence what its extent or amount was, or what part of the settlement was intended to compensate for it and what part to make up to the petitioner the amount it would have earned except for the course pursued by the Reserve Bank. On the record we must affirm the respondent.

Judgment will be entered for the respondent.