West Seattle National Bank of Seattle v. Commissioner of Internal Revenue

This ease presents the question whether upon a sale of corporate assets pursuant to a plan of complete liquidation with the accounts receivable being sold at face value, the taxpayer’s reserve for bad debts constitutes ordinary income and is taxable as such or constitutes gain and is free from tax under § 337(a) of Internal Revenue Code of 1954, 26 U.S.C.A. § 337 (a).

The taxpayer, an incorporated national banking association conducting a general banking business in Seattle, Washington, adopted a plan of complete liquidation on January 27, 1956. Pursuant to this plan, the taxpayer on that date sold all of its assets including its loans receivable to the National Bank of Commerce of Seattle. Final distribution to its stockholders was made by the taxpayer on May 28, 1956. At the time of sale, taxpayer was carrying on its books a reserve for bad debts in the amount of $19,250.70.

In its income tax return for the period from January 1, 1956, to May 28, 1956, the taxpayer reported the sale of its loans receivable at face value. The difference between the face value sale price and the net or book value of its loans (being the amount of bad debt reserve) was reported as gain and…