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Bongiovanni v. Commissioner of Internal Revenue

decided: December 11, 1972.

JOHN P. AND ALICE BONGIOVANNI, APPELLANTS,
v.
COMMISSIONER OF INTERNAL REVENUE, APPELLEE



Moore, Hays and Mulligan, Circuit Judges.

Author: Hays

HAYS, Circuit Judge:

The only point in contention on this appeal is whether Section 357(c) of the Internal Revenue Code of 1954, which imposes a tax on otherwise tax-free Section 351 transfers where the liabilities assumed by the taxpayer's wholly-owned corporation exceed the adjusted basis of property transferred, applies to a cash basis taxpayer's "liabilities" consisting of trade accounts payable.*fn1 The Commissioner determined that the transfer resulted in a taxable gain and the Tax Court affirmed his ruling. We reverse.

I. Factual Background

John P. and Alice Bongiovanni, husband and wife, filed a joint federal income tax return for the year 1965 with the District Director of Internal Revenue at Hartford, Connecticut on or before the due date of April 15, 1966. Since Alice Bongiovanni is a party to this litigation solely because she filed the joint return with her husband, we will refer to John P. Bongiovanni as the "appellant" in this case.

From 1963 to 1965 taxpayer-appellant ran a masonry contracting business known as the Keystone Masonry Company. It was a sole proprietorship and operated on the cash receipts and disbursements method of accounting. On or about April 1, 1965, the taxpayer transferred all of the assets and liabilities of his sole proprietorship to the Keystone Masonry Corporation which had been duly organized under the laws of the State of Connecticut. The transaction was obviously undertaken with an eye to the benefits of the federal income tax laws involving business reorganizations and it met the requirements of Section 351 of the Internal Revenue Code. In exchange for the assets of the sole proprietorship, appellant received all of the stock of the corporation consisting of 500 shares of common stock listed on the books and records of the corporation at a value of $26,000, together with the corporation's promissory note in the amount of $51,253, payable on demand. The assets transferred to the corporation and the liabilities assumed were as follows:

Amount or Appellant's

Item Value Basis

Cash $223 $223

Trade Receivables 57,741 -0-

Office Equipment 1,160 1,160

Work-in-Process 22,762 -0-

Raw Materials 8,029 -0-

Tools and Supplies 4,575 -0-

$94,490 $1,383

Less: Payables 17,237 ...


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