Freda v. Commissioner
United States Court of Appeals for the Seventh Circuit
656 F.3d 570 (2011)
C & F (plaintiff) developed a proprietary sausage-freezing process and shared it with Pizza Hut under an agreement, but alleged Pizza Hut passed the process to competitor IBP, which used it to win Pizza Hut's business away from C & F. C & F sued both IBP and Pizza Hut for trade-secret misappropriation, winning a $10.9 million verdict against IBP and separately settling with Pizza Hut for $15.3 million, which C & F reported as capital gains. The IRS (defendant) reclassified the Pizza Hut settlement as ordinary income, and the Tax Court affirmed; C & F appealed.
Whether, for tax classification purposes, money received in settlement of litigation is treated as having the same nature and basis as the underlying right the litigation sought to vindicate.