Assumption of Contingent Liabilities on Sale of a Business

Abstract

This article discusses the federal income tax consequences of a buyer's assumption of contingent liabilities in a taxable sale of the assets of a trade or business. Although judicial precedent remains scarce, several articles written over the past few years have considered this issue. Nevertheless, the matter remains unsettled both as to the theoretically correct result and, perhaps, more importantly, as to what is required to achieve a workable solution.
Since the Treasury apparently considers the treatment of contingent liabilities to be ripe for a regulation project, my hope here is to clarify the issues and to present the options in a comprehensive and orderly manner so as to facilitate a decision. Although I do not describe current law in detail, I indicate where the possible approaches might differ from existing precedent and, therefore, to what extent it might be necessary to seek legislation. A solution is made more difficult, in some circumstances, by the reintroduction of a substantial difference between the rates applicable to ordinary income and capital gains.