- 14 -
character from the distributions in liquidation which such
payments would have served to diminish. Bauer v. Commissioner,
15 T.C. 876, 878-79 (1950), revd. sub nom. Commissioner v.
Arrowsmith, 193 F.2d 734 (2d Cir. 1952), affd. 344 U.S. 6
(1952). The Supreme Court agreed with the Commissioner’s
position and held that the payments by the taxpayers were
allowable only as capital losses because they arose from the
earlier capital transaction.
Courts have applied the Arrowsmith v. Commissioner, supra,
relation-back doctrine in favor of both the taxpayer and the
Government in a myriad of factual settings.7 The relation-back
doctrine has also been invoked under different labels, such as
the “tax benefit rule” of United States v. Skelly Oil, 394 U.S.
678 (1969) or the “origin of claim” rule established in cases
such as Clay v. Commissioner, T.C. Memo. 1981-375. Regardless
of the label given to the principle, this Court has consistently
framed it as follows:
the most appropriate tax treatment of the transaction
in the later year is obtained by examining the
7 For example, the relation-back doctrine has been utilized
not only in the context of corporate liquidations, but also in
the context of: (1) Settling lawsuits or paying attorneys’ fees
in connection with a previous disposition of property, Kimbell v.
United States, 490 F.2d 203 (5th Cir. 1974); (2) refunding or
adjusting purchase prices, United States v. Skelly Oil Co., 394
U.S. 678 (1969); and (3) cases dealing with section 16(b) of the
Securities and Exchange Act of 1934 (currently codified at 15
U.S.C. sec. 78p(b)), Brown v. Commissioner, 529 F.2d 609 (10th
Cir. 1976), revg. T.C. Memo. 1973-275.
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