Williams v. McGowan
52 F.2d 570 (2d Cir. 1945)

  • Williams and Reynolds co-owned a hardware business. Eventually Reynolds died and Williams paid Reynolds' estate to buy the entire business. Soon after, Williams turned around and sold the business.
    • Williams had a loss on the part of the business he owned, but made a gain on the part of the business he bought from Reynolds' estate.
  • When he filed his taxes, Williams listed both the gain and the loss as ordinary income. The IRS disagreed.
    • The IRS argued that the business was bundle of capital assets (26 U.S.C. 117(a)(1)), and so each gain or loss should be taxed individual as long-term capital gains and long-term capital losses.
    • Williams argued that he was not in the trade or business of selling businesses and so the gains or losses should be considered capital gains or capital losses.
  • The Trial Court found for the IRS. Williams appealed.
  • The Appellate Court reversed.
    • The Appellate Court found that when selling a business, the assets must be broken down and considered individually.
      • Basically, a taxpayer like Williams can't just list an asset as "hardware business." Instead they have to break it all down into "building" "fixtures" "inventory" "accounts receivable" etc, and account for each asset individually. Some of those assets will count as capital assets, and others will not.
  • Congress later codified this ruling in 26 U.S.C. 1060.