transfer of assets and liabilities of the taxpayer’s sole proprietorship to his wholly-owned corporation is not a taxable exchange, despite Code § 357 (which includes as taxable gain the excess of liabilities assumed by the corporation plus liabilities to which the property is subject over the total adjusted basis of the property transferred), where the transferred assets (accounts payable) could not be recognized as a deduction since the taxpayer had used a cash-basis accounting system
How later courts described this case
- transfer of assets and liabilities of the taxpayer’s sole proprietorship to his wholly-owned corporation is not a taxable exchange, despite Code § 357 (which includes as taxable gain the excess of liabilities assumed by the corporation plus liabilities to which the property is subject over the total adjusted basis of the property transferred), where the transferred assets (accounts payable) could not be recognized as a deduction since the taxpayer had used a cash-basis accounting system
Written by the judges who cited it.
The opinion
Simpson, J., concurring: I should like to begin by borrowing the words of Mr. Justice Frankfurter who once said: "Wisdom too often never comes, and so one ought not to reject it merely because it comes late.” Henslee v. Union Planters Bank, 335 U.S. 595, 600 (1949). When I wrote the opinion in Thatcher, I fully appreciated the consequences of adopting a literal interpretation of section 357(c), but I felt compelled to reach such result. To adjudicate that controversy, we were required to decide whether, when the term "liability” was used in section 357(c), Congress intended for it to have a literal or more restrictive meaning. I consider that our ultimate responsibility is to find out what Congress had in mind when it used the term and to apply such meaning in deciding the case. Of course, I carefully considered the interpretations suggested by the parties in the Thatcher case, those suggested by my colleagues, those adopted by other courts, and those suggested by the writers, but although some of them appeared to provide a satisfactory answer to one set of facts, none of them seemed to be supported by history and to provide a rational application of the provision.
Subsequently, I was very interested in the article "A Definition of 'Liabilities’ in Internal Revenue Code Sections 357 and 358(d)” by Kahn and Oesterle in the Michigan Law Review ( 73 Mich. L. Rev. 461 (1975)). The approach suggested by them appeared to be consistent with the history of the provisions now contained in sections 357 and 358, and it produces results which are rational and which one may conclude were intended by the Congress. I was happy to see that when this case came before Judge Sterrett for decision, he decided to embrace that approach, and I am now glad to join with him in this decision.