111 T.C. No. 13
UNITED STATES TAX COURT
BRIAN L. AND CAROLE J. NAHEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8497-96. Filed October 21, 1998.
W, a corporation, sued X for breach of contract and
misrepresentation for failing to complete the
installation of a computer system and sought damages for
lost profits. X counterclaimed for withheld payments by
W.
In 1986, P, through his two S corporations, acquired
all of the assets and assumed all of the liabilities of
W, including W's lawsuit against X and X's counterclaim
against W. W was thereafter liquidated. No part of the
purchase price for W's assets was allocated to the claim
against X.
In 1992, the lawsuit with X was settled for total
consideration of $6,345,183. The settlement proceeds
were paid to the S corporations and reported as long-term
capital gain that passed through to P. R determined that
the settlement proceeds constituted ordinary income. P
asserts that the lawsuit constituted a capital asset and
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