Albany Car Wheel Co. v. Commissioner

Albany Car Wheel Company (ACW) (plaintiff) acquired the assets of a chilled-iron wheel manufacturer, Old Co. ACW paid $15,000 in cash on a note to Old Co. and acquired liabilities of $74,360. The tax commissioner (defendant) contended that resulted in ACW having a cost basis in the business of $89,360, representing the sum of the note and liabilities. ACW claimed its basis was $137,544, which was the book value of the business when it belonged to Old Co. ACW argued that the higher basis included assuming Old Co.’s obligation to pay its employees severance under its union contract. However, although the new contract recited that ACW assumed Old Co.’s liability for severance pay, ACW’s obligations were quite different and contingent. Old Co.’s union contract said that if the plant permanently closed, workers would receive four or eight weeks’ severance pay depending on seniority, resulting in a liability for about $48,000 to 111 workers when Old Co. sold the business. In contrast, ACW’s new union contract required only six to 12 weeks’ notice to the employees before the plant permanently closed to avoid paying severance. All ACW had to do was continue paying ordinary wages until the closure. Moreover, that was exactly what happened when the plant actually closed. ACW provided notice, continued paying workers until closure, and never paid any severance. Finally, ACW deducted the wages on its tax return to determine the costs of goods sold that year. As a result, the tax commissioner concluded that ACW’s basis excluded any liability for severance and totaled $89,360. ACW petitioned the tax court for review.