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Abstract: 

This article will address the tension that exists between deducting the expense associated with the liability and capitalizing the liability as an assumed liability connected to the acquisition. First, the article will describe contingent liabilities in a general context. Second, the article will describe common situations where contingent liabilities arise. Third, the article will provide a detailed discussion of the tax treatment of contingent liabilities. Fourth, the article provides a discussion of how the courts and IRS have applied these rules in common contingent liability situations, including nonrecognition transactions. Finally, the article addresses some recent issues regarding the tax treatment of the transfer of contingent liabilities in the formation of a corporation.

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Affiliations:  1: Kennedy Covington Lobdell & Hickman, L.L.P.; 2: Pepper Hamilton LLP.