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On February 15, 1996, Messrs. Huse, Nymark, and Steel, the
directors and shareholders of BFI, consented to the assignment of
the lawsuit to Ottar, Inc., a corporation in which Messrs. Huse,
Nymark, and Steel owned all outstanding stock. On February 16,
1996, BFI executed an assignment agreement which assigned BFI’s
rights in the lawsuit to Ottar for the benefit of the individual
partners of Bochica.7 Neither Bochica nor Ottar reported any tax
effects from this transaction.
On the same day as the assignment of the lawsuit, Bochica
and Norway closed on the stock sale. Bochica used its entire
basis to compute its gain from the sale of the BFI stock.
Petitioners recognized gain from the sale as part of their
distributive share from Bochica. At the close of BFI’s taxable
year on July 31, 1996, BFI’s earnings and profits exceeded the
value of the lawsuit.
Following the assignment of the lawsuit, the Bochica
partners were substituted as plaintiffs in the suit against the
insurer, and an amended complaint was filed to reflect the
change. In 1996, the insurer paid $172,175 on the insurance
claim. This amount was distributed to the general partners
according to their respective interests:
7BFI was an accrual basis taxpayer, and at the time of the
assignment it had not accrued income from the insurance claim
except for the May 1993 payment. No income was accrued since the
value of the claim was disputed and could not be ascertained.
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