Wilford E. Thatcher v. Commissioner of Internal Revenue

Two individual taxpayers and a corporation seek reversal of a Tax Court decision holding taxable as a gain under 26 U.S.C. § 357 (c) (1970) the excess of partnership liabilities assumed by the corporation over the partners’ basis in the assets they transferred to the corporation in a § 351 exchange.

From 1956 to 1963, Wilford Thatcher and Karl Teeples engaged in business as partners. The enterprise acquired diversified assets and liabilities. The partners filed tax returns under the cash receipts and disbursements method of accounting. In 1963, the partners formed Teeples and Thatcher, Inc., and transferred to that corporation all the partnership’s assets in exchange for all the authorized shares of the corporation.

The assets transferred consisted of $317,-146.96 in unrealized receivables (partially completed construction contracts) and other properties valued at $325,892.33. The corporation concurrently assumed $164,065.54 in accounts payable and $264,194.25 in other obligations. During 1963, the corporation collected the accounts receivable and paid the accounts payable. The corporation reported as income its receipts on accounts receivable and deducted as expenses the…