## Facts

- Shareholders of W. F. Taylor Company, Inc. received corporate assets, including the Free State Plantation, upon the corporation’s liquidation on December 30, 1936.
- The liquidation distributed one-half of the assets to the plaintiffs and one-half to another shareholder; corporate liabilities of about $145,766 were assumed pro rata by the distributees.
- In 1936, the shareholders reported capital gain from the liquidation; the assumed liabilities were treated as reducing the gain recognized from the distribution.
- By 1955, after the liabilities had been discharged, plaintiffs sold the plantation (which had appreciated) and reported capital gain from the sale.
- For the 1955 sale, plaintiffs computed basis by including the plantation’s fair market value at the 1936 distribution and adding the liabilities assumed in 1936.
- The Commissioner determined plaintiffs could not include the assumed liabilities in basis for the 1955 sale, asserted deficiencies, and plaintiffs paid and sued for refunds in consolidated actions in the Court of Claims.

## Issues

1. Whether shareholders who received property in corporate liquidation and whose assumed liabilities reduced gain recognized in the liquidation year may later increase the property’s basis by those same liabilities when computing gain on a subsequent sale.
2. Whether the proper basis of property received in liquidation is limited to its fair market value at distribution, without a further increase for assumed corporate liabilities previously used to reduce liquidation gain.

## Decision

- The Court of Claims held plaintiffs were not entitled to increase basis by including liabilities assumed in 1936 and paid before the 1955 sale.
- The court treated the basis of property received in the liquidation as the property’s fair market value at the time of distribution.
- The court rejected using the same liabilities both to reduce recognized gain in 1936 and to increase basis (reducing gain) in 1955.
- Plaintiffs recovered only to the limited extent of an adjusted-basis computation error conceded by the government, excluding any increase based on the assumed liabilities.
- Plaintiffs’ post-judgment motion for rehearing and to vacate the judgment was denied.

## Legal Principles

- For property received by shareholders in a corporate liquidation, basis is generally the fair market value of the property at the time of distribution (consistent with the rule later codified in I.R.C. § 334(a)).
- A taxpayer may not obtain a double tax benefit by using assumed liabilities to reduce gain in the liquidation year and again to increase basis on a later disposition of the distributed property.
- Basis rules applicable to property acquired by purchase (cost basis) do not control where the property is received as a liquidating distribution.

## Conclusion

The Court of Claims ruled that shareholders who received property in liquidation could not add previously assumed corporate liabilities to basis on a later sale when those liabilities had already reduced the shareholders’ taxable gain from the liquidation; basis was limited to fair market value at the time of distribution, subject only to unrelated conceded computational corrections.


Ford v. United States, 311 F.2d 951 (Ct. Cl. 1963)