Arrowsmith v. Commissioner

Holding

Losses incurred by shareholders in satisfying transferee liability after the corporation's liquidation must be characterized as capital losses because they arise from the same transaction that produced the original capital gain.

Facts

Arrowsmith and another shareholder liquidated their corporation in 1937 through 1940, reporting the distributions as capital gains. In 1944 they were required as transferees to pay a judgment against the dissolved corporation. They sought to deduct the payment as an ordinary loss.

Reasoning

The Court held that the character of the loss is determined by reference to the originating transaction. Because the underlying liquidating distributions produced capital gain, payments that effectively returned part of those distributions were capital losses. Tax law looks beyond the single year to the transactional consistency required by Burnet v. Sanford & Brooks.