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Memo. 2002-113 (holding that settlement proceeds were taxable as
ordinary income because no sale or exchange of a capital asset
occurred, with only one party having the right to receive
property), affd. 78 Fed. Appx. 585 (9th Cir. 2003).
In determining whether a sale or exchange occurred for
petitioners, we focus on whether Pacific Bank received anything
in return for the $500,000; i.e., anything other than the
discharge of petitioners’ lawsuit claim concerning the policy.
We are unable to conclude that it did. Petitioners argue that
Pacific Bank received more than the extinguishment of the lawsuit
2(...continued)
(1988), affd. 196 F.3d 866 (7th Cir. 1999), on a somewhat
different rationale; i.e., that the right to recover in the
lawsuit against Xerox, a substitute for lost profits, retained
its character as an asset productive of ordinary income after it
passed to the S corporations. By analogy, it seems likely that
the Crown life policy, had its ownership been transferred to Ms.
Eckersely, would have generated ordinary income to petitioners
under sec. 83, at least to the extent of its cash surrender value
(which has not been shown to have been less than the $500,000
received). Thus, it would appear that the $500,000 would have
the character of ordinary income under the affirming court’s
reasoning as well as under that of our own opinion in Nahey (we
relied on the absence of a sale or exchange). We recognize that
Judge Cudahy in his concurring opinion in Nahey v. Commissioner,
196 F.2d at 870, expressed concern that the court’s opinion might
be difficult to reconcile with Pac. Transp. Co. v. Commissioner,
483 F.3d 209 (9th Cir. 1973), vacating and remanding T.C. Memo.
1970-41, a case that we would be obliged to follow were it
directly on point given that it was decided by the court to which
an appeal of this case lies. We do not believe that Pac. Transp.
Co. has any applicability here where, unlike there, there was no
“intermediate transaction”. Apparently, the parties think
likewise as neither party cited Pac. Transp. Co. in the opening
posttrial briefs.
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