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assets in a capital transaction.4 As such, the Arrowsmith doctrine
is inapplicable.
We have considered all of petitioners' other arguments and
find them to be not relevant or without merit.
In conclusion, we hold that the settlement of the Xerox
lawsuit did not constitute a sale or exchange; consequently, the
settlement proceeds constitute ordinary income, not capital gain,
to petitioners. Inasmuch as petitioners allocated no part of the
purchase price for Wehr's assets to the Xerox lawsuit, they
acquired no basis in the lawsuit. Thus, the entire settlement
proceeds are includable in gross income.
To reflect the foregoing,
Decision will be entered
for respondent.
4 As stated in Fahey v. Commissioner, 16 T.C. at 108, and
reiterated in Pounds v. United States, 372 F.2d at 349, the mere
occurrence of a sale or exchange of the subject asset at some
point in time is not sufficient to obtain capital gain treatment
on a later disposition. The sale or exchange must be proximate
to the event which gave rise to the gain.
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