Tax Treatment of Payments to Seller’s Creditors: ‘Temnorod v. Commissioner’

In their latest article for the New York Law Journal, Elliot Pisem and David E. Kahen write:

“If a buyer of property assumes a liability of the seller or acquires property subject to a liability, the seller’s amount realized for tax purposes generally includes the amount of the liability (Treas. Reg. § 1.1001-2(a)). The buyer in turn generally includes the liability, as an acquisition cost, in its tax basis for the property (see, e.g., Treas. Reg. § 1.1060-1(c)) and cannot claim a current deduction for paying the liability, whether payment is made at the time of the acquisition or at a later date.

 

Application of these basic tax rules can become challenging where the assumed liability is also attributable to business activities of the buyer. The Tax Court in Temnorod v. Commissioner (TC Memo 2025-127) very recently addressed the treatment of such liabilities in the context of a purchase of assets of a business in bankruptcy proceedings. The purchaser reflected on its tax return the purchaser’s funding of the payment of liabilities as costs of goods sold in the year of the acquisition. The court found that the position taken on the purchaser’s tax return was at odds with the characterization of the liabilities in the asset purchase agreement with the bankrupt company and on an amended tax return of the seller (which was under common control with the purchaser), and ultimately agreed with the government’s position that the payments made to satisfy the liabilities were required to be capitalized by the purchaser into the basis of longer-lived assets and could not be deducted in the year of the acquisition.”

Read the article here.