Estate of Heinz Schmidt, Deceased, and Charlotte Schmidt v. Commissioner of Internal Revenue

This is a petition to review a decision of the Tax Court of the United States, reported at 42 T.C. 1130 . We reverse.

The facts are not in dispute. From 1935 until June 30, 1959 taxpayer husband operated a business as a single proprietorship. Pursuant to permission given by the Commissioner of Internal Revenue, the business, which was on the accrual basis of accounting, used the reserve method of accounting for bad debts. As of June 30, 1959 the business had accounts receivable in the amount of $914,-564.38 and the reserve amounted to $27,-445.71. On that date the taxpayer transferred the business to a corporation in exchange for an agreement by the corporation to assume all of the liabilities of the business and the issuance to the taxpayer of shares of the corporation’s stock. The corporation continued to conduct the same business. The accounts receivable were transferred subject to the reserve, and in computing the net value of the business ($45,023.19) as required by the agreement, the reserve was deducted from the face amount of the receivables. The taxpayer received stock of the corporation having a par value of $45,000.

The Commissioner assessed a deficiency in the income…