- 14 -
otherwise allocable to such asset is treated "under principles of
tax law applicable when part of the cost of an asset (not
previously reflected in its basis) is paid after the asset has
been disposed of, depreciated, amortized or depleted." Sec.
1.338(b)-3T(d)(2), Temporary Income Tax Regs., 51 Fed. Reg. 3593
(Jan. 29, 1986).
Section 1.338(b)-3T(j), Example (1)(vi), Temporary Income
Tax Regs., 51 Fed. Reg. 3595 (Jan. 29, 1986) considers the
disposition of stock (a capital asset) before a liability became
fixed and determinable. Since the stock had been disposed of
prior to the contingent liability's becoming fixed, no amount of
the increase in AGUB attributable to such asset was allocable to
any other asset, including goodwill and going concern value. See
discussion supra pp. 13-14. Instead, the example directs the
taxpayer to deduct the liability as a capital loss under the
principles of Arrowsmith v. Commissioner, 344 U.S. 6 (1952).
In Arrowsmith, a corporation liquidated, and its
shareholders reported their gain as capital. In a later year, a
judgment was rendered against the former corporation. The
erstwhile shareholders paid the judgment for the corporation
because they were transferees of its assets. They deducted the
entire amount paid as an ordinary loss. However, the Supreme
Court determined that the losses that resulted from the payment
of the judgment stemmed from a legal obligation arising out of
the prior liquidation. Since the original transaction was a
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