Louis Spitalny and Betty Spitalny, His Wife v. United States of America, William Erdwurm and Bart F. Erdwurm, His Wife v. United States

Appellees brought suit for refund of income taxes and interest in the amount of $110,407.71 assessed against them as transferees of a wholly owned corporation liquidated in February, 1960. The judgment of the District Court ( 288 F. Supp. 650 (D.Ariz.1968)) was in their favor and the United States has taken this appeal.

The taxpayer corporation was engaged in the business of cattle feeding. Feed on hand, the cost of which had been fully deducted as an expense of doing business, was sold by the corporation pursuant to its plan of liquidation for $177,-437.37. The question presented is whether the corporation can treat the fully ex-pensed feed as taking a zero basis and the full price received on sale as non-recognized gain under § 337, Int.Rev. Code, 1954, 26 U.S.C. § 337 .

Appellees organized the All-State Cattle Feeding Company, a corporation to conduct the business of cattle feeding, in February, 1957. It filed four annual corporate income tax returns with fiscal years ending July 31. Each year it elected not to report inventories but to deduct from gross income for each period the cost of feed and supplies purchased during the year, as permitted under §§ 1.162-12 and 1.162-3…