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Williams v. McGowan

United States Court of Appeals for the Second Circuit
152 F.2d 570 (1945)


Williams (plaintiff) formed a hardware business with Reynolds in 1926. Williams had a two-thirds interest in the company and Reynolds had a one-third interest. Williams and Reynolds granted each other the privilege of purchasing each other’s interest in the business if and when one of them withdrew. They ran the business together until Reynolds’ death in 1940. Williams purchased Reynolds’ interest in the business from Reynolds’ executrix for $12,187.90. Later that year, Williams sold the business for the value of the business in addition to $6,000. Around the time of sale, the business’ value included about $8,100 in cash, $7,000 in receivables, $800 in fixtures, and $49,000 in merchandise inventory, minus $1,000 for bills payable. The business’ total value amounted to about $63,926.28. Williams sustained a loss upon the sale of his original two-thirds interest and realized a small gain upon the sale of Reynolds’ one-third interest. He reported both items as ordinary income rather than as capital assets. The Commissioner disallowed treatment of the items as ordinary income. Williams paid income tax accordingly and then brought suit to recover the amount overpaid. The trial court dismissed Williams’ complaint.

Rule of Law


Holding and Reasoning (Hand, J.)

Dissent (Frank, J.)

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