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inextricably related to the capital gain which resulted from the
liquidation.
Here, petitioners assert that the receipt of the settlement
proceeds is related to a prior transaction, namely the acquisition
of Wehr's assets, citing Bresler v. Commissioner, 65 T.C. 182
(1975). In Bresler, the shareholder of an S corporation sought to
treat the proceeds from the settlement of an antitrust lawsuit as
capital gain, asserting that the settlement was intended to
compensate the taxpayer for losses that resulted from the earlier
sale of certain properties. We rejected that argument because the
earlier sale of the properties resulted in ordinary losses under
section 1231, and thus under Arrowsmith v. Commissioner, supra, the
settlement proceeds constituted ordinary income.
Petitioners have misapplied the rationale of Arrowsmith and
its progeny, including Bresler, to the situation herein. The
acquisition of Wehr's assets was not the basis for the lawsuit
against Xerox, and the settlement in favor of the S corporations
was not related to the leveraged buy out. Cf. West v.
Commissioner, 37 T.C. 684, 687 (1962). The origin of the claim in
this case was Xerox's breach of contract, as detailed in the
complaint filed by Wehr in the District Court. The treatment of
the settlement proceeds as ordinary income or capital gain is not
dependent on the fact that the S corporations acquired Wehr's
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