Easson v. Commissioner of Internal Revenue

Jack Easson (plaintiff) owned and operated an apartment-building property that was subject to a mortgage, for which Easson was personally liable. In 1952, Easson transferred the building into a newly formed corporation, Envoy Apartments, in exchange for all of its stock. Easson remained personally liable on the mortgage. At the time of transfer, Easson had basis in the property of $87,214.86. The remaining mortgage balance was $247,064.01, and the fair market value of the property was $320,000. Easson reported no gain on the transaction on his tax return pursuant to § 112 of the Internal Revenue Code (IRC) [Editor’s Note: now § 351]. The commissioner of the Internal Revenue Service (defendant) assessed the transaction as taxable at ordinary income rates. Easson appealed the assessment to the United States Tax Court, which held that only a portion of the gain should have been recognized in 1952: the difference between the basis and the balance on the mortgage. Subtracting the mortgage from Easson’s basis in the property resulted in -$159,849.15. The Tax Court held that, because Easson could not have a negative basis in the shares, this amount would escape taxation if unrecognized. Thus, the Tax Court held that $159,849.15 was taxable at the time of the transaction and that Easson’s basis in the shares was $0. Both the commissioner and Easson appealed the decision to the United States Court of Appeals for the Ninth Circuit.