Contingent and unliquidated assumed liabilities increase basis of purchased assets.

• Author: Trachtenberg, Jane I.

In Field Service Advice (FSA) Memorandum 1999-841, the IRS held that a taxpayer's assumption of a contingent and unliquidated liability in connection with an asset purchase results in a basis increase for the taxpayer.

The taxpayer had purchased the assets of a publishing company. Under the terms of the agreement, it assumed the obligation to deliver the publication to prepaid subscribers. The taxpayer sought to capitalize the cost of producing and delivering the editorial pages (but not the advertising pages) and added that cost to the basis of the acquired assets.

The IRS agreed with the taxpayer, citing Magruder v. Supplee, 316 US 394 (1941). The Court, in Magruder, held that a "purchaser's payment of real estate taxes for which the seller was personally liable and which were a lien on the purchased property was part of the cost of acquiring the property and, thus, must be included in the basis of the property."

Likening the taxpayer's situation to Magruder...