Hoops, LP v. Commissioner: Section 404(a)(5) and the Assumption of Deferred Compensation Liabilities in the Sale of a Business

The taxpayer countered that it should be allowed a present deduction under the deemed payment theory-that it had effectively paid the liability through its acceptance of a lower purchase price in exchange for the buyer's assumption of the liability. After hearing oral argument, the Seventh Circuit held for the Commissioner, affirming the Tax Court's decision that Section 404(a)(5) controlled the outcome. Hoops should have been allowed a present deduction under the deemed payment theory applied by the Tax Court in Commercial Security Bank2 in recognition of the fact that it bore the liability through its acceptance of a lower purchase price on the sale of its business. [...]Treas. Reg. § 1.461-4(d)(5)(f) accelerates the deduction for liabilities for which economic performance has not occurred when such liabilities are included in amount realized in the sale of a business.