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
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.