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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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