Rev. Rul. 69-442

In the case of Peter and Wanda J. Raich v. Commissioner, 46 T.C. 604 (1966), the petitioner conducted a sheetrock and drywall contracting business under the name of Pete Raich Sheetrock Taping Service. The business was conducted as a sole proprietorship, the income of which was reported on the cash receipts and disbursements method of accounting. The taxpayer transferred to a newly organized corporation all of the assets of the sole proprietorship in exchange for all of the stock of the corporation plus the assumption by the corporation of all of the liabilities of the sole proprietorship in a transaction that met the requirements of section 351 of the Internal Revenue Code of 1954. The liabilities assumed by the corporation consisted of trade accounts payable and notes payable. The assets transferred consisted substantially of trade accounts receivable that had not been taken into income under the taxpayer's method of accounting.

The Tax Court of the United States held that the trade accounts receivable had a zero basis in the hands of the taxapayer who reported his income on the cash receipts and disbursements method of accounting. The liabilities assumed by the corporation were in excess of the adjusted basis of all of the assets transferred. The Tax Court applied section 357(c) of the Code to the excess of the liabilities assumed over the adjusted basis of the assets transferred and held that the taxpayer realized a gain on the transfer to the extent of such excess.

The Internal Revenue Service will apply section 357(c) of the Code to other situations involving similar facts inasmuch as such section literally applies and the legislative history clearly supports the application of that section under such circumstances. However, the Service wishes to point out that the trade accounts receivable would not have had a zero basis if the taxpayer had been on the accrual method of accounting prior to the transfer of the business under section 351 of the Code.