## Facts

- Albany Car Wheel Co., Inc. (petitioner) was formed by purchasers unrelated to the seller to acquire and operate a chilled-iron wheel manufacturing plant from an earlier company.
- The chilled-iron wheel business was in decline, and petitioner’s president estimated the plant’s remaining economic life at two to five years.
- Before the sale, the seller had a union contract requiring severance pay upon permanent plant closure, with an estimated liability of about $48,000.
- In connection with the acquisition, petitioner obtained a release of the seller from that union contract by entering into a new union agreement.
- Under the new agreement, petitioner promised either (a) six or twelve weeks’ written notice or (b) severance pay in lieu of notice; severance was owed only if petitioner could not give the required notice.
- Petitioner acquired the plant assets in 1955; the Commissioner treated purchase cost as a note plus assumed liabilities totaling $89,360.
- Petitioner claimed a higher basis of $137,544 by recording the assets at the seller’s book value (about $135,449.40) and booking a $46,089.05 “reserve” as a liability for the notice/severance obligation.
- When the plant later closed, petitioner gave the required notice and continued paying ordinary wages during the notice period; it paid no separate severance.
- Petitioner deducted the wages paid during the notice period as ordinary business costs (through cost of goods sold).

## Issues

1. Whether petitioner’s basis in acquired assets under I.R.C. § 1012 included a $46,089.05 reserve for potential notice/severance payments under a new union contract, beyond the note and other liabilities assumed.

## Decision

- The Tax Court sustained the Commissioner’s deficiency determination for 1955.
- The court held petitioner overstated its cost basis by including the $46,089.05 reserve.
- Basis was limited to the note and noncontingent liabilities actually assumed (approximately $89,360).
- The Second Circuit affirmed, agreeing the union-contract obligation did not increase basis.

## Legal Principles

- Under I.R.C. § 1012, asset basis equals cost: amounts actually paid or fixed, noncontingent obligations incurred as purchase consideration.
- An assumed obligation does not increase basis when it is contingent and can be satisfied through ordinary, deductible operating payments (such as wages during a notice period).
- An accounting reserve that reconciles book values, without a fixed, enforceable purchase-price obligation, is not part of cost basis.
- Expected future payments should not both increase basis and later be deducted as ordinary expenses, because that would permit duplicative tax benefits.

## Conclusion

The Tax Court held that petitioner could not add a contingent notice/severance reserve under its new union agreement to the cost basis of acquired plant assets, because the obligation was avoidable through continued employment during the notice period and the related wage payments were ordinary deductible expenses rather than capital acquisition costs.


Albany Car Wheel Co. v. Commissioner, 40 T.C. 831 (1963)