Brian L. and Carole J. Nahey - Page 10

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          characterized as ordinary income or long-term capital gain.  The            
          resolution of this issue turns on whether the requirements for              
          obtaining capital gain treatment are satisfied, including whether           
          the settlement of Wehr's lawsuit against Xerox constitutes a "sale          
          or exchange".                                                               
               The parties center their arguments on the "origin of the               
          claim" test to determine whether the settlement proceeds should be          
          characterized as capital gain or ordinary income.  See United               
          States v. Hilton Hotels Corp., 397 U.S. 580 (1970); Woodward v.             
          Commissioner, 397 U.S. 572 (1970); United States v. Gilmore, 372            
          U.S. 39 (1963); Gidwitz Family Trust v. Commissioner, 61 T.C. 664,          
          673 (1974); Keller Street Dev. Co. v. Commissioner, T.C. Memo.              
          1978-350, affd. 688 F.2d 675 (9th Cir. 1982).  We, however, shall           
          focus our attention on whether the settlement of the lawsuit                
          constitutes a sale or exchange.                                             
               A sale or exchange is a prerequisite to the rendering of               
          capital gain treatment. Sec. 1222; Estate of Nordquist v.                   
          Commissioner, 481 F.2d 1058, 1061 (8th Cir. 1973), affg. T.C. Memo.         
          1972-198; Ackerman v. United States, 335 F.2d 521, 526-527 (5th             
          Cir. 1964); Breen v. Commissioner, 328 F.2d 58, 64 (8th Cir. 1964),         
          affg. T.C. Memo. 1962-230.  The phrase "sale or exchange" is not            
          defined in section 1222, but we apply the ordinary meaning to those         
          words.  Helvering v. William Flaccus Oak Leather Co., 313 U.S. 247,         
          249 (1941).                                                                 





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