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Rosen v. Commissioner of Internal Revenue, 62 T.C. 11

Facts

David Rosen operated a sole proprietorship engaged in leasing and selling coin-operated jukeboxes and cineboxes. In June 1967, he transferred the assets and liabilities of his cinebox business to Filmotheque, a corporation he controlled, while remaining personally liable for the debts. At the time of the transfer, the liabilities exceeded the assets, and Filmotheque was insolvent. Rosen sought outside financing to support the business but ultimately remained responsible for the debts.

Petitioner was engaged in the leasing and selling of coin box equipment and phonograph records. The major portion of his business was conducted through his wholly owned corporation, David Rosen, Inc., although he did have numerous other business entities carrying on related aspects of the business.

Issue

Did David Rosen realize gain under section 357(c) in the taxable year 1967 on the transfer of all the assets and liabilities of his sole proprietorship to a corporation, to the extent that the liabilities assumed exceeded his adjusted basis in the assets transferred?

The resolution of such issue will determine whether and to what extent petitioners have a net operating loss for 1967 which they would be entitled to carry back as a deduction to the taxable year 1965.

Rule

Under section 357(c)(1), if the sum of the liabilities assumed exceeds the total adjusted basis of the property transferred in an exchange to which section 351 applies, the excess shall be considered as a gain from the sale or exchange of property.

Sec. 357(c)(1) provides: SEC. 357. ASSUMPTION OF LIABILITY. (c) LIABILITIES IN EXCESS OF BASIS.— (1) IN GENERAL.— In the case of an exchange— (A) to which section 351 applies, or (B) to which section 361 applies by reason of a plan of reorganization within the meaning of section 368(a)(1)(D). if the sum of the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceeds the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be.

Analysis

The court determined that the transfer of the cinebox business to Filmotheque constituted an exchange under section 351. Although Rosen remained personally liable for the liabilities, the statute does not require the transferor to be relieved of liability for the gain to be recognized. The liabilities assumed exceeded the adjusted basis of the assets transferred, resulting in a realized gain under section 357(c)(1).

As a result of the foregoing transactions, the petitioner is deemed to have transferred to Filmotheque assets having a basis of $144,761.58 subject to liabilities, payable other than to the petitioner, in the amount of $292,076.83. To the extent that such liabilities exceeded the petitioner's basis for the assets transferred, the respondent has determined that the petitioner realized a gain under section 357(c)(1).

Conclusion

The court concluded that Rosen realized a gain of $147,315.25 on the transfer, negating any net operating loss for 1967 that could be carried back to 1965.

Having determined that the petitioner realized a gain in the amount of $147,315.25 on account of the transfer of the cinebox business to Filmotheque, it becomes necessary to determine the character of such gain.

Who won?

The Commissioner of Internal Revenue prevailed because the court upheld the determination that Rosen realized taxable gain from the transfer of assets and liabilities.

The respondent determined deficiencies in the Federal income tax of the petitioners for the taxable years 1965 and 1967 in the amounts of $3,481.33 and $87,010.81, respectively.

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