Rev. Proc. 67-33

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to provide general guidelines and procedure to facilitate proper tax accounting for amounts realized by taxpayers in settlement of certain antitrust actions brought under section 4 of the Clayton Act (15 U.S.C. 15).

SEC. 2. BACKGROUND.

.01 The amounts in question were realized in settlement of civil suits for treble damages institute by a number of regulated public utilities under section 4 of the Clayton Act in the so-called `Electrical Equipment Antitrust Cases.' Section 4 of the Clayton Act provides as follows:

Any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor in any district court of the United States in the district in which the defendant resides or is found or has an agent, without respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee.

.02 The facts and circumstances preceding the settlement of these civil suits for treble damages are similar to those described in Rev. Rul. 64-224, C.B. 1964-2, 52. As indicated therein, the underlying basis for the civil suits was the criminal prosecution of the defendants under section 1 of the Sherman Anti-Trust Act, 15 U.S.C. 1, for conspiracy to fix prices in restraint of trade. The defendants in these criminal actions were convicted of violating the Sherman Anti-Trust Act. Their pleas of guilty and nolo contendere resulted in the imposition of fines on the corporate defendants and both fines and prison terms on some of the individual defendants.

.03 Subsequent to the criminal proceedings, the utility-taxpayers filed suits for damages under section 4 of the Clayton Act for injuries occasioned by the payment of higher prices for property to be used in their businesses than they would have had to pay in the absence of a price-fixing conspiracy. Many of these civil suits were settled prior to verdict or judgment by agreements providing for the payment of amounts aggregating less than the amount of actual damages alleged therein. A portion of the amounts realized in settlement was properly attributable to the legal fees and expenses incurred by the utility-taxpayers in pursuing their damage claims, which expenses in many instances had been deducted by them in prior years as business expenses under section 162(a) of the Internal Revenue Code of 1954. In some cases the portion of the settlement to be paid with respect to such legal expenses was separately stated in the settlement agreement entered into by the parties.

SEC. 3. DISCUSSION OF GENERAL RULES.

.01 The Internal Revenue Service recognizes the general rule that an amount realized in settlement of a legal action should be treated, for purposes of the Federal income tax, in accordance with the type of claim to which it is attributable. For example, to the extent that the amount realized represents redress for injury or loss with respect to property held by a taxpayer and used in his trade or business, it is considered to represent a restoration of capital to the extent of his capital interest.

.02 Hence the Service accepts the principle that to determine whether a particular amount realized in settlement of a taxpayer's claim for damages under section 4 of the Clayton Act is to be included in gross income or is to be considered a return of capital, it must first be ascertained what the amount represents.

.03 To the extent that an amount realized in settlement of an action brought under section 4 of the Clayton Act is attributable to a taxpayer's claim for the trebling of actual damages which is provided for by that section, it does not represent a restoration of capital but will be included in the taxpayer's gross income. Commissioner v. Glenshaw Glass Co. , 348 U.S. 426 (1955), Ct. D. 1783, C.B. 1955-1, 207.

.04 Similarly, since in the cases to which this Revenue Procedure applies legal expenses incurred in pursuing a claim for damages under section 4 of the Clayton Act, a special statutory action in the nature of an action in tort, are deductible expenses under section 162(a) of the Code, an amount later realized in settlement of such an action which is properly attributable to the recovery of such expenses generally does not represent a recovery of capital.

SEC. 4. CONCLUSION.

In the case of a regulated public utility realizing amounts in settlement of its claims for treble damages under section 4 of the Clayton Act for injuries sustained as the result of a price-fixing conspiracy referred to in section 2.02 above, the Internal Revenue Service will permit the taxpayer to account for such amounts in the following manner:

.01 Where the taxpayer has reasonably established that the actual damages sustained as a result of the price-fixing conspiracy were in excess of the amounts realized in settlement of the action under section 4 of the Clayton Act, excluding therefrom amounts properly attributable to the recovery of the related legal expenses, it will be presumed, in the absence of substantial evidence of facts to the contrary, that no part of such recovery represents the taxpayer's claim for `punitive' or exemplary damages. Otherwise, the principle stated in section 3.03 above will be applied.

.02 The taxpayer will be permitted to treat as a return of capital that portion of the amounts realized in settlement (1) which is properly attributable to the actual damages sustained and (2) which is not in excess of the adjusted bases of those assets used in the taxpayer's business which were involved in the suit for damages, but an appropriate adjustment to the bases of such assets in the taxable year of the settlement will be required.

.03 That portion of the amounts realized in settlement of such an action which is properly attributable to a recovery of the taxpayer's costs of suit must be included in the gross income of the taxpayer, but only to the extent not excluded there from by the application of section 111 of the Code pursuant to the regulations thereunder. Where a portion of the settlement has been separately stated in the settlement agreement to be payable for such recoverable costs, the correctness of the amount designated will not be questioned unless it is unreasonable in the light of all the facts.

¹ Also released as Technical Information Release 919, dated July 31, 1967.