Galvin Hudson v.
Commissioner case brief
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20 T.C. 734, 1953 U.S. Tax
Ct.
CASE SYNOPSIS: In
consolidated proceedings in the United States Tax Court respondent
Commissioner of Internal Revenue determined deficiencies in income
tax for the year 1945. Petitioners challenged that finding.
FACTS: Petitioners purchased a judgment from the residuary legatees of an estate. The party against whom the judgment was made paid petitioners a sum in full settlement of the judgment against him. Each of the petitioners reported his profit on the settlement of the judgment for income tax purposes as a long-term capital gain. Petitioners contended that they were entitled to the benefits of I.R.C. § 117(a) with regard to the gain from the settlement of the judgment. Respondent determined that the gain was ordinary income and taxable as such. The parties differed on the question of whether there was a sale or exchange of a capital asset under I.R.C. § 117(a)(4). The court found that there was not a transfer of property when the judgment debtor acquired property as the result of the transaction wherein the judgment was settled. When the judgment debtor settled the judgment, the claim arising from the judgment was extinguished without the transfer of any property or property right to the judgment debtor. When petitioners received the money in full settlement of the judgment, they did not recover it as the result of any sale or exchange but only as a collection or settlement of the judgment.
CONCLUSION: Judgment in favor of respondent Commissioner of Internal Revenue was sustained because the gain realized by petitioners from the settlement of a judgment was not recovered as the result of any sale or exchange but only as a collection or settlement of the judgment and was therefore ordinary income.
FACTS: Petitioners purchased a judgment from the residuary legatees of an estate. The party against whom the judgment was made paid petitioners a sum in full settlement of the judgment against him. Each of the petitioners reported his profit on the settlement of the judgment for income tax purposes as a long-term capital gain. Petitioners contended that they were entitled to the benefits of I.R.C. § 117(a) with regard to the gain from the settlement of the judgment. Respondent determined that the gain was ordinary income and taxable as such. The parties differed on the question of whether there was a sale or exchange of a capital asset under I.R.C. § 117(a)(4). The court found that there was not a transfer of property when the judgment debtor acquired property as the result of the transaction wherein the judgment was settled. When the judgment debtor settled the judgment, the claim arising from the judgment was extinguished without the transfer of any property or property right to the judgment debtor. When petitioners received the money in full settlement of the judgment, they did not recover it as the result of any sale or exchange but only as a collection or settlement of the judgment.
CONCLUSION: Judgment in favor of respondent Commissioner of Internal Revenue was sustained because the gain realized by petitioners from the settlement of a judgment was not recovered as the result of any sale or exchange but only as a collection or settlement of the judgment and was therefore ordinary income.
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