Opinion ID: 408238
Heading Depth: 2
Heading Rank: 4

Heading: Characterizing the $2,432,175.45 Payment

Text: 47 Having decided that the payment at issue here was a result of the sale of the brewery, that is, the sale of capital assets, we must next see how the payment fits into the tax treatment of capital transactions. 48 The Tax Court stated that because the final judgment in state court was the product of a settlement, the next step was to analyze the nexus between the origin of the claim settled and the basis upon which the settlement was reached. Keller v. Commissioner, at 1461. After examining the state court's judgment in some detail, the Tax Court concluded that the nexus in question is that of a claim for rescission with the $2,432,175.45 payment made as a direct result of the rescission. Id. at 1462. 49 It would seem that under this analysis the Tax Court was unable to determine the tax character of the $2,432,175.45 payment until it decided that the state court's designation of the payment as a substitute for product or profit is controlling. The payment was thereby characterized as ordinary income, and one is left to wonder why the nexus analysis was even used. 50 We believe the proper approach is first to determine the nature of the event or transaction that is the origin of the claim. Here, having determined that the sale of the brewery assets was the origin, we identified the nature of the sale as that of a capital transaction. Because identifying the origin of the claim as a capital transaction does not automatically resolve the tax treatment of the payment at issue, 4 we must next examine how the payment fits into the structure of a capital transaction. 51 The state court stated that it was awarding the $2,432,175.45 to compensate Keller for the fact that Maier had held the assets and had benefited from their earning power during the ten years of litigation. The manner in which the amount was determined, i.e. by applying an interest rate to the value of the assets, is consistent with that explanation. Thus, we conclude that the $2,432,175.45 is analogous either to interest paid to a seller to compensate for delay in the payment of a purchase price, or to rent paid for the temporary use of income producing property. 52 As both these analogous situations involve compensation that is taxable as ordinary income, 5 we must ultimately conclude, therefore, that the $2,432,175.45 payment is akin to interest or rent, and hence is taxable to Keller as ordinary income. IV