- 13 - 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.Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Next
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