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I.R.C. § 23(g) treats losses from sales or exchanges of capital assets as "capital losses" and I.R.C. § 115(c) requires that liquidation distributions be treated as exchanges.
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. Petitioner taxpayers sought review of the decision.
Did the court of appeals err in reclassifying the loss in question as capital loss?
On petition for writ of certiorari, 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.