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these amounts were actually payments received from an
insurance company in settlement of claims and were not
proceeds from the sale or disposition of capital
assets. Since they are not sale proceeds they are
considered ordinary income.
* * * * * * *
We have increased your ordinary income to include the
amounts that you reported on Schedule D as capital
gains and identified as additional stock proceeds. It
has been determined that these amounts were actually
payments received from an insurance company in
settlement of claims and were not proceeds from the
sale or disposition of capital assets. Since they are
not sale proceeds they are considered ordinary income.
Discussion
Respondent determined that the source of the proceeds from
the insurance company was the settlement of the lawsuit and that
the proceeds were not received as part of a sale or exchange.
Petitioners contend that the rights under the lawsuit, including
the right to any settlement proceeds, were received as additional
consideration from the sale of their BFI stock.
“[N]ot every gain growing out of a transaction concerning
capital assets is allowed the benefits of the capital gains tax
provision. Those are limited by definition to gains from ‘the
sale or exchange’ of capital assets.” Dobson v. Commissioner,
321 U.S. 231, 231-232 (1944); Pounds v. United States, 372 F.2d
342, 348 (5th Cir. 1967). A sale or exchange must be shown for a
taxpayer to receive long-term capital gain treatment. Nahey v.
Commissioner, 111 T.C. 256, 262 (1998), affd. 196 F.3d 866 (7th
Cir. 1999). This requirement is found in section 1222(3), which
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Last modified: May 25, 2011