The Story of Hendler: From Pyrrhic Victory to Modern Section 357
Karen C. Burke
University of Florida Levin College of Law
BUSINESS TAX STORIES, Foundation Press, 2005
San Diego Legal Studies Paper No. 08-049
This chapter focuses on the landmark decision in United States v. Hendler, 303 U.S. 564 (1938), involving assumption of liabilities in a corporate reorganization. In Hendler, the Supreme Court held that a corporate transferee's assumption and prompt payment of the corporate transferor's liabilities were equivalent to receipt of cash (boot), triggering gain under the Internal Revenue Act of 1928. Immediately after winning Hendler, the government recognized that the decision potentially affected numerous earlier incorporations and reorganizations and could lead to significant revenue loss.The upshot was that, in 1939, Congress hastily amended the statute to nullify the government's pyrrhic victory.
The anti-Hendler amendments, now embodied in Sections 357, 358 and 362, provided that assumption of liabilities would not be considered boot but required that the transferor's basis be reduced to ensure that the deferred gain would be preserved rather than entirely eliminated. Even though Hendler was decided more than 60 years ago, the precise contours of liability assumptions have yet to be fully clarified. During the 1990's, tax-shelter promoters sought to take advantage of perceived ambiguities in the statutory framework, prompting Congress to overhaul the liability assumption rules in 1999 to more accurately reflect economic reality. Nevertheless, the 1999 amendments may be criticized for ignoring precisely the valuation and administrability concerns foreseen by the 1939 Code drafters. Thus, Hendler and its aftermath remain relevant in understanding contemporary efforts to reform and rationalize the treatment of liability assumptions.
Number of Pages in PDF File: 27
Keywords: Hendler, liability, contingent, corporate, assumption, nonrecognition, tax shelter, Black & Decker, Coltec
JEL Classification: K34Accepted Paper Series
Date posted: April 22, 2005 ; Last revised: August 14, 2008
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