Illinois Tool Works, Inc. & Subsidiaries - Page 13

                                       - 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                       

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

Last modified: May 25, 2011