- 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 Next
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