Rev. Rul. 62-128

A taxpayer, engaged in a business as a sole proprietor, transferred all of the assets of his business, subject to its liabilities, to a corporation controlled by the transferor in a nontaxable exchange under the provisions of section 351 of the Internal Revenue Code of 1954. Prior to the transfer, the business had, on its books of account, a reserve for bad debts which had been accumulated by additions for which the taxpayer had derived full tax benefits in prior taxable years. Held, under these circumstances the reserve for bad debts is not transferable to any other entity. Accordingly, the reserve for bad debts represents ordinary income to the taxpayer for the taxable year during which the transfer of the accounts receivable was made since, during such time, his need for the reserve ceased. See Geyer, Cornell & Newell, Inc. v. Commissioner, 6 T.C. 96, acquiescence, C.B. 1946-1, 2; Rev. Rul. 57-482, C.B. 1957-2, 49; and C. Standlee Martin, Inc. v. Riddell, 56-2, U.S.T.C. 9989, 51 A.F.T.R. 1376. Under similar circumstances, a partnership must likewise include such reserve for bad debts in its final return as ordinary income. However, to the extent that the additions to the reserve for bad debts in prior years may not have resulted in tax benefits, they need not be included in the transferor's gross income. See M. & E. Corporation v. Commissioner, 7 T.C. 1276, acquiescence, C.B. 1947-1, 3.