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Freda v. Commissioner
United States Court of Appeals for the Seventh Circuit
656 F.3d 570 (2011)
C & F (plaintiff), a meat-processing company, developed a new way to freeze sausages. C & F reached an agreement with Pizza Hut, under which Pizza Hut would buy sausages from C & F so long as C & F divulged the details of its freezing process to Pizza Hut. Pizza Hut allegedly divulged C & F’s freezing process to IBP, a C & F competitor. IBP implemented the process and began selling its sausages to Pizza Hut. In a separate action, C & F sued IBP and Pizza Hut for misappropriation of its trade secret. C & F won a $10.9 million verdict against IBP and settled its case with Pizza Hut for $15.3 million. C & F reported the settlement amount as capital gains on its income tax returns. The Internal Revenue Service (IRS) (defendant) disallowed this classification, finding that the settlement amount should be taxed as ordinary income. C & F appealed to federal court, arguing that its trade secret was a capital asset, and thus the settlement recovery should be treated as a capital gain for tax purposes. The United States Tax Court affirmed the IRS’s decision. C & F appealed.
Rule of Law
Holding and Reasoning (Tinder, J.)
Dissent (Manion, J.)
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