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rights constituted a sale or exchange for purposes of the capital
gain provisions. In holding that a sale or exchange of the
surrendered lease occurred, the Court of Appeals for the Second
Circuit stated that Congress was disenchanted with the "formalistic
distinction" between a sale of property rights to third parties
(which would give rise to capital gain or loss) and the release of
those rights that results in their extinguishment (and which would
not give rise to capital gain or loss). The court continued:
In the instant case we can see no sensible business basis
for drawing a line between a release of Ferrer's rights
* * * and a sale of them * * *. * * * Tax law is
concerned with the substance, here the voluntary passing
of "property" rights allegedly constituting "capital
assets," not with whether they are passed to a stranger
or to a person already having a larger "estate." * * *
Id. at 131.
Petitioners have misread Ferrer and its import. Ferrer (and
the cases cited therein) can be factually distinguished from the
instant case because in Ferrer the taxpayer's interest (or lease)
to produce the play and prevent the author's transfer of film
rights did not disappear but instead reverted to the author after
the taxpayer surrendered the lease; whereas in the instant case,
the S corporations' rights in the lawsuit vanished both in form and
substance upon the receipt of the settlement proceeds.
In the case herein, the S corporations and Xerox settled the
lawsuit originally brought by Wehr. The S corporations received
consideration of $6,345,183; Xerox received nothing other than the
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