Galvin Hudson v. Commissioner

Brief Fact Summary. Petitioners purchased an outstanding judgment from the estate of Mary Harahn. The debtor paid the judgment to Petitioners and they realized a profit.

Synopsis of Rule of Law. Gain realized not from a sale or exchange of a capital asset may not be treated as a capital loss or gain.

Facts. Mary Harahan obtained a judgment against Howard Cole of $75,702.12. Petitioners purchased this judgment for Mary Harahan’s estate. The cost of the judgment was $11,004. Howard Cole paid Petitioners $21,160 as full settlement of the judgment. Each Petitioner reported the profit as a long-term capital gain. The Commissioner of Internal Revenue determined that the profit should count as ordinary income.

Issue. Whether the gain is ordinary income or capital gain

Held. Judge Johnson issued the opinion for the Tax Court in affirming the Commissioner and holding that the gain is ordinary income.

Discussion. Petitioners did not recover the money as the result of any sale or exchange, but as a collection or settlement of a judgment. There was not a sale or exchange of a capital asset.