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Hempt Bros., Inc. v. United States - 490 F.2d 1172 (3d Cir. 1974)


The difficulty presented in both 26 U.S.C.S. § 337 and 26 U.S.C.S. § 351 cases is that the statute expressly provides for no-gain and no-loss tax consequences by virtue of the actual liquidation or transfer. Nothing in the statutory schema permits an immunization of normal tax consequences arising out of those separate activities which may accompany a liquidation under § 337 or a transfer under § 351 but which are not inherently a necessary aspect of the liquidating or transferring process.


Appellant partnership maintained books using the cash method of accounting. Accordingly, in computing its income, the partnership did not take into account uncollected receivables, and inventories were not used in the calculation of the cost of goods sold. Under 26 U.S.C.S. § 351, the partnership was transferred to appellant taxpayer solely in exchange for the taxpayer's capital stock. Appellee Commissioner of Internal Revenue determined appellant's accounting method did not clearly reflect its income. The Commissioner's accrual method treatment involved fixing basis of the beginning inventory that had been transferred to the partnership, at zero, and took into account inventories in computing the cost of goods sold, resulting in deficiency assessments. The partnership paid and then sued for a refund. The lower court granted judgment to the Commissioner, holding that the taxpayer was properly taxed upon collections made with respect to accounts receivable which were transferred to it in conjunction with the Section 351 incorporation. Appellant partnership challenged the decision.


Did the Tax Commissioner err in assessing a deficiency against the taxpayer partnership?




The Court of Appeals for the Third Circuit affirmed the judgment of the district court, holding that the deficiencies were nothing more than some of the myriad of different consequences that could result from a change to the corporate form of doing business or from the acquisition of stock of a corporation rather than corporate assets. According to the Court, nothing in the statutory schema permitted an immunization of normal tax consequences arising out of separate activities that could accompany a transfer under § 351, but that were not inherently a necessary aspect of the transferring process.

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