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On appeal, the Court of Appeals for the Seventh Circuit
dismissed the taxpayer’s argument that a contingent liability
that was insusceptible of present valuation at the time of the
acquisition could not be capitalized as a cost of acquisition.
The Court of Appeals held that, when the actual amount of the
contingent liability is known, the amount can be added to the
cost basis of the purchased property. David R. Webb Co. v.
Commissioner, 708 F.2d 1254, 1258 (7th Cir. 1983), affg. 77 T.C.
1134 (1981).
We conclude that David R. Webb Co., not Nahey v.
Commissioner, supra, is applicable to the facts in this case. In
Nahey, the issue was whether proceeds of litigation prosecuted to
judgment were taxed as capital gains or ordinary income. The
Court of Appeals held that the proceeds were ordinary income to
the buyer of the corporation that had initially held the legal
claim for lost corporate income. In that context, the Court
noted that the character of income did not change as a result of
the acquisition, stating that "what was transferred as part of a
corporate acquisition was an asset that yields ordinary income".
Nahey v. Commissioner, supra at 869. We are not persuaded by
petitioner's attempt to extend this rationale to the present case
in contravention of the consistently applied rule that payment of
liabilities assumed as part of an acquisition must be
capitalized.
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