Nash v. United States

RESPONDENT: United States
LOCATION: Holmes County Board of Education

DECIDED BY: Burger Court (1969-1970)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 398 US 1 (1970)
ARGUED: Apr 21, 1970
DECIDED: May 18, 1970

Facts of the case


Media for Nash v. United States

Audio Transcription for Oral Argument - April 21, 1970 in Nash v. United States

Warren E. Burger:

Next case on for argument is number 678, Nash against the United States.

Mr. Apolinsky' you may proceed whenever you’re ready.

Harold I. Apolinsky:

Mr. Chief Justice and may it please the Court.

This is an income tax case on the writ of certiorari to the United States Court of Appeals for the Fifth Circuit.

The question is whether the balance in a reserve for bad debts maintained by a partnership and stipulated by the parties to be reasonable must be taken into ordinary income or not by the partnership when it incorporates its business under Section 351 of the Internal Review Code.

Section 351 providing that no gain or loss will be recognized if property is transferred to a controlled corporation and it’s agreed by the parties that the transfers' the incorporations here are within the purview of Section 351.

Warren E. Burger:

What would have happened to this reserve if they have liquidated Mr. Apolinsky?

Harold I. Apolinsky:

If the partnership had liquidated --

Warren E. Burger:

They just liquidated it would've -- would it have gone into ordinary income then?

Harold I. Apolinsky:

No, Your Honor, under the partnership concept, liquidating to the various partners, each would have taken his pro rata part of the receivable with the reserve and it would not have come into the income of the partners.

Warren E. Burger:

It wouldn't have entered the transaction at all?

Harold I. Apolinsky:

No sir.

Because you have come straight through.

Potter Stewart:

He should have taken his pro rata part of the receivables plus -- and his pro rata part of the reserve, is that right?

Harold I. Apolinsky:

Yes, Mr. Justice Stewart --

Potter Stewart:

The partnership probably has to report as an entity, it isn’t a taxable entity basically?

Harold I. Apolinsky:

That’s right.

Potter Stewart:

It’s a group of individuals?

Harold I. Apolinsky:

That's right and in this situation, this partnership operated 10 finance businesses, two in South Carolina and eight in Alabama.

It made loans to the public and it used the accrual method of accounting under which it would take into its ordinary income the profit on a loan, the receivable in the year in which the loan was made and the receivable established.

It accounted for its bad debts by the use of the reserve method for the bad debts allowed under Section 166 of the Code.

Actually, a taxpayer can use either of two methods.

It can use the direct charge-off method which allows you to charge against income in the year that the account goes bad or a taxpayer can anticipate its losses as far as specific accounts are concerned and establish a reserve for bad debts and based on its experience, estimate the amount of the accounts receivable which will go bad and charge that amount against income when it establishes its reserve.

The reserve is reviewed annually and any additions to the reserve are likewise charged against income as a deduction and they're limited of course to the reasonableness of the reserve which in our situation is stipulated.

On May 31, 1960, the partnership had about approximately $487,000.00 worth of receivables in these eight Alabama offices and approximately a $73,000.00 balance in its reserve for bad debts applicable to those eight offices.

It then on June 1 transferred to eight separate corporations for it attained a benefit under the Alabama loan licensing statutes by have eight separate corporate offices that could lend money and it transferred to those eight offices the receivables applicable to the eight corporations.

The furniture and fixtures applicable to the eight corporations, cash applicable to the eight corporations and liabilities taking back stock and security solely for the net value transferred to the partnership to the corporations.

It continued the same businesses in the eight corporations and what it did, the corporations then set up the reserve, they had an opening balance which they reflected in their reserve for bad debts in total and we’re dealing here in both briefs with the total concept.

The total amount of the reserves reflected in the opening balance sheets of these eight corporations was $73,000.00.

In 1962, the Commission of Internal Revenue issued his Revenue Ruling 62-128 where he first expressed the position that the reserve for which being maintained by a partnership would be taken back into the ordinary income of the partnership when it transfers its assets even though such transfer being under the tax free rules generally of Section 351 and thereafter, the Commissioner's agent examined the returns of the partnership which made a determination that the $73,000.00 of reserve should be restored to the ordinary income of the partnership in its year which ended in 1961.