Keller Street Development Company v. Commissioner of Internal Revenue

I

OVERVIEW

Keller Street Development Company (“Keller”) appeals the Tax Court’s decision that certain monies, received by Keller as a result of a sale of assets and subsequent litigation, are to be treated as ordinary income. Keller sold a brewery to Maier Brewing Company (“Maier”) in 1958. The day after the sale, Keller’s minority shareholders brought a derivative suit. After ten years of litigation in the California courts, a final judgment was issued, detailing the terms of sale the court deemed necessary to make the transaction fair to all parties. One element of the new terms ordered by the court was a $2,432,175.45 sum designed to compensate Keller for the fact that Maier was holding, and had the benefit of, the brewery assets for the ten years of litigation.

Keller treated that amount as an adjustment in the sales price, hence, a capital gain. The Commissioner issued a deficiency notice, contending the sum was a substitute for ordinary income and should be taxed as such. The Tax Court held for the Commissioner. Keller Street Development Co. v. Commissioner, T.C.M. (CCH) 1978-350 (1978).

The result reached by the Tax Court is correct. We believe, however, that we must…