- 13 -
should be the same as if the subsequent event had occurred at
the time of the prior event.6
In Arrowsmith v. Commissioner, supra at 7, the taxpayers
liquidated a corporation in which they had equal stock
ownership. Partial distributions were made from 1937 to 1940,
and the taxpayers classified and reported these distributions as
capital gains in each year. In 1944, 4 years after the last
distribution, a judgment was entered against the taxpayers as
the corporation’s transferees. Each taxpayer paid his or her
share of the judgment and deducted his or her payment as an
ordinary business expense. The Commissioner characterized the
taxpayers’ payments made pursuant to the judgment in 1944 as
capital losses, not ordinary expenses, that arose out of the
original 1940 liquidation. The Commissioner maintained that
“the payment of the judgment ‘grew out of, was related to, and
took its character from a capital transaction’” and that the
judgment payments could not be disassociated in their ultimate
6 The relation-back doctrine is commonly employed to
distinguish between capital and ordinary treatment of a
transaction. The problem usually arises when a court must
distinguish between capital and ordinary treatment in determining
the character of a subsequent gain or loss which is directly
related to an earlier transaction. To that end, courts routinely
hold that if there has been an “adjustment”, “renegotiation”, or
“revision” of the original selling price of the asset, the
character of the subsequent transaction follows the character of
the initial transaction. The relation-back doctrine has also
been used to prevent taxpayers from receiving what is effectively
a double benefit.
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011