HEMPT BROS., INC. v. UNITED STATES Case Brief
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Case Brief Summary & Legal Analysis
tl;dr: A cash-basis partnership incorporated under § 351, transferring its accounts receivable. The court held that § 351’s non-recognition rule overrides the assignment of income doctrine, making the new corporation—not the partnership—taxable upon collection of the receivables.
Legal Significance: This case establishes that accounts receivable are “property” under § 351 and that the statute’s non-recognition policy supersedes the assignment of income doctrine when an ongoing business is incorporated for a valid business purpose, thus deferring taxation until collection by the corporation.
Case Facts & Court Holding
Key Facts & Case Background
A cash-basis partnership transferred all its assets and liabilities to Hempt Bros., Inc. (taxpayer), a newly formed corporation, in exchange for the corporation’s stock. The transaction qualified as a tax-free exchange under 26 U.S.C. § 351(a). Among the assets transferred were accounts receivable, valued at over $662,000, for services previously rendered by the partnership. The partnership had not recognized this amount as income. Also transferred was inventory with a fair market value of over $351,000, the cost of which the partnership had already fully deducted, resulting in a zero tax basis. The Commissioner of Internal Revenue assessed tax deficiencies against the corporation for income recognized upon its subsequent collection of the accounts receivable. The corporation paid the deficiencies and sued for a refund. It argued that under the assignment of income doctrine, the partnership (the transferor) should have been taxed on the receivables. The corporation also contended that the tax benefit rule entitled it to a stepped-up basis in the transferred inventory equal to its fair market value.
Court Holding & Legal Precedent
Issue: Does the non-recognition provision of § 351 of the Internal Revenue Code override the assignment of income doctrine, thereby requiring the transferee corporation, rather than the transferor partnership, to recognize income upon the collection of accounts receivable transferred during a valid incorporation?
Yes. The court affirmed the district court’s summary judgment for the United Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur. Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum. Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad m
IRAC Legal Analysis
About IRAC analysis
IRAC (Issue, Rule, Analysis, Conclusion) is the structure professors expect in exam answers. Each LSD.Law brief states the issue, the governing rule with citations, the court's application of that rule, and the conclusion - the same reasoning pattern you will use on exams and in practice.
Legal Issue
Does the non-recognition provision of § 351 of the Internal Revenue Code override the assignment of income doctrine, thereby requiring the transferee corporation, rather than the transferor partnership, to recognize income upon the collection of accounts receivable transferred during a valid incorporation?
Conclusion
This case provides a foundational rule in corporate tax law that § Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco l
Legal Rule
In a transfer of an ongoing business to a corporation that qualifies Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu f
Legal Analysis
The court first determined that accounts receivable fall within the meaning of Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur. Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum. Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur. Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum. Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur. Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum. Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse
Flash-to-Full Case Opinions
Flash Summary
- In a § 351 incorporation of an ongoing business, the statute’s