This section contains the nature of the case and procedural background.

Arrowsmith (P) and another held stock in a corporation. They decided to liquidate and divide the proceeds. Partial distributions were made from 1937-1940. P reported the profits as capital gains. A judgment was rendered against the old corporation in 1944 and against Bauer individually. P and his ex-partner then paid the judgment of the corporation. They classified this loss as an ordinary business one and each deducted 100% of the amount paid. The IRS did not like that and claimed that the loss was a capital loss. The Tax Court sided with P, and the appeals court sided with the IRS. The appeals court decision conflicted with the Third Circuit in Switlik. The Supreme Court granted certiorari.

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