- 12 -
gain treatment because no sale or exchange occurred. In reaching
our conclusion, we quoted from the opinion of the Court of Appeals
for the District of Columbia in Hale v. Helvering, supra (relating
to the compromise of a note for less than face value):
There was no acquisition of property by the debtor, no
transfer of property to him. Neither business men nor
lawyers call the compromise of a note a sale to the
maker. In point of law and in legal parlance property in
the notes as capital assets was extinguished, not sold.
In business parlance the transaction was a settlement and
the notes were turned over to the maker, not sold to him.
* * *
Fahey v. Commissioner, supra at 109.2
In Hudson v. Commissioner, supra, the taxpayers purchased a
50-percent interest in a judgment from the legatees of an estate,
and subsequently the taxpayers settled the judgment with the
debtor. The taxpayers reported the payment of the judgment as
capital gain. We held that the payment should be characterized as
ordinary income, explaining:
We cannot see how there was a transfer of property,
or how the judgment debtor acquired property as the
result of the transaction wherein the judgment was
settled. The most that can be said is that the judgment
debtor paid a debt or extinguished a claim so as to
preclude the execution on the judgment outstanding
2 Our reasoning in Fahey v. Commissioner, 16 T.C. 105
(1951), was followed by the Court of Appeals for the Fifth
Circuit in Pounds v. United States, 372 F.2d 342, 349 (5th Cir.
1967), a case relied on by petitioners in support of their
argument that the Xerox lawsuit was a capital asset. The Pounds
court found that no sale or exchange occurred on the payment of a
12-1/2 percent profit interest in a land deal because following
the transaction only one party, the taxpayer, received property
(the cash payment).
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Next
Last modified: May 25, 2011