Albany Car Wheel Co. v. Commissioner - 333 F.2d 653 (2d Cir. 1964)

Rule:

Where an obligation under a contract is too speculative, it cannot be included in the cost basis of the acquired assets.

Facts:

Petitioner Albany Car Wheel Company, Inc. purchased the operating assets of corporation that manufactured and sold chilled iron wheels. A union contract required severance pay to employees. Petitioner used the reserved amount for severance as part of his cost basis for tax purposes. Respondent Commissioner of Internal Revenue Service claimed that petitioner had overstated the cost basis of its assets, which the tax court upheld. Petitioner appealed. 

Issue:

Under the circumstances, did the petitioner overstate the cost basis of its assets? 

Answer:

Yes.

Conclusion:

The court upheld the decision of the tax court because the amount of excess basis was based on obligation of severance pay under a union contract. However, the court noted that the new union contract allowed petitioner to avoid severance pay if it could give the required notice to the employee. The court held that the union contract was too speculative to be included in the cost basis of the acquired assets.