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that the settlement of the lawsuit constituted a sale or
exchange for purposes of the capital gain provisions.
Held: The settlement of the lawsuit between the S
corporations and X did not constitute a sale or exchange
pursuant to sec. 1222, I.R.C., and thus the settlement
proceeds received by the S corporations and passed
through to P constitute ordinary income.
Robert A. Schnur and Joseph A. Pickart, for petitioners.
George W. Bezold and Christa A. Gruber, for respondent.
JACOBS, Judge: Respondent determined a $185,833 deficiency in
petitioners' 1992 Federal income taxes.
The deficiency herein arises from the parties' dispute over
the characterization of settlement proceeds from a lawsuit that was
brought by a corporation whose assets, including the lawsuit, were
purchased by petitioners' two S corporations. The sole issue we
must decide is whether the settlement proceeds received by the S
corporations (and passed through to petitioners) constitute
ordinary income, as respondent contends, or long-term capital gain,
as petitioners contend.1
All section references are to the Internal Revenue Code as in
effect for the year in issue.
1 In their petition contesting respondent's determination
that the settlement proceeds received by the S corporations (and
passed through to petitioners) constitute ordinary income,
petitioners asserted, as an alternative position, that the S
corporations should have reported the settlement proceeds as a
nontaxable return of capital. In their posttrial brief,
petitioners abandoned this alternative argument.
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