Tuesday, April 2, 2013

Arrowsmith v. Commissioner case brief

Arrowsmith v. Commissioner case brief summary
344 U.S. 6 (1952)

Petitioner taxpayers sought review of a judgment of the United States Court of Appeals for the Second Circuit, reversing a judgment of the tax court and holding that a loss arising from the affairs of a liquidated corporation whose assets were transferred to petitioners was to be classified as a capital loss as opposed to an ordinary business loss.

OVERVIEW: Petitioner taxpayers decided to liquidate and divide the proceeds of a corporation. Petitioners reported profits obtained from distributions of capital as capital gains. Subsequent to liquidation, petitioners were required to pay a judgment arising from the affairs of the "old" liquidated corporation; they classified the loss as an ordinary business loss and obtained a greater deduction than if a capital loss had been taken. Respondent Commissioner of Internal Revenue viewed the payment as part of the original liquidation of the corporation and classified it as a capital loss. The tax court disagreed and found it to be an ordinary business loss.

The court of appeals reversed and reclassified the loss as capital.
-The United States Supreme Court held that I.R.C. § 23 treated losses from sales or exchanges of capital assets as "capital losses," which included liquidation distributions handled pursuant to I.R.C. § 115.

-The Court then affirmed upon the conclusion that petitioners' losses fell squarely into the category of capital loss.
-The two individual's liabilities were not based on any ordinary business transaction of theirs, but only because they were the transferees of the corporation's assets.
-The Court noted that if the judgment had been paid in the same year that the two individuals split up the corporation, then the payments would have diminished the capital gain that they received.
OUTCOME: The Court affirmed the judgment, holding that petitioners' losses in relation to a corporation, whose assets had been liquidated and transferred to them, were capital losses as opposed to ordinary business losses despite the fact that they occurred subsequent to the transfer. This was so because the Internal Revenue Code treated losses from exchanges of capital assets, such as liquidation distributions, as "capital losses."

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