The opinion of the court was delivered by: SHERIDAN
SHERIDAN, District Judge:
Plaintiff, Hempt Bros., Inc., seeks to recover income taxes alleged to have been improperly assessed and collected. Jurisdiction is asserted pursuant to 28 U.S.C.A. Section 1346(a) (1). The parties have filed a joint stipulation of facts, and plaintiff has moved for summary judgment. Briefs have been submitted and oral argument made with respect to plaintiff's motion.
From 1942 until February 28, 1957, a partnership comprised of plaintiff's shareholders was engaged in the business of quarrying and selling stone, sand, gravel and slag; manufacturing and selling ready-mix concrete and bituminous materials; constructing roads, highways and streets, principally for the Pennsylvania Department of Highways and various political subdivisions of Pennsylvania; and constructing driveways, parking lots, street and water lines, and related accessories. The partnership maintained its books and filed its partnership income tax return on a calendar-year basis pursuant to the cash method of accounting. Accordingly, it included neither uncollected receivables nor inventories in its calculation of taxable income, although both items existed to a substantial extent at the end of each year.
On March 1, 1957, the partnership's business and most of its assets were transferred to plaintiff solely in exchange for plaintiff's capital stock; neither gain nor loss was recognized upon the exchange. Int. Rev. Code of 1954, Section 351(a). Among the assets transferred were accounts receivable of $662,824.40 and inventories of $351,266.05.
As a result of an examination extending over a period of years, the Commissioner of Internal Revenue
determined that plaintiff's accounting method did not clearly reflect income. The corporation therefore was required to use the accrual method commencing with its first taxable year,
and adjustments were made to accrue unreported sales and to account for inventories in computing the cost of goods sold. Plaintiff's opening inventory for its first taxable year was valued at zero, and the result was an increase in taxable income for that year.
Hempt Bros., Inc. filed timely refund claims with respect to each of its first three taxable years in which it contended, inter alia, that amounts collected on transferred accounts receivable should be excluded from its income because the partnership performed all the services upon which the right to collection depended, and that its initial opening inventory should be valued at not less than $351,266.05 in order to consistently account for beginning and ending inventory during its first taxable year. Each claim was disallowed in full, and plaintiff then instituted this action to recover alleged overpayments.
With respect to the transferred accounts receivable, plaintiff argues that they are not " property" within the meaning of Section 351(a) and that the partnership therefore realized recognizable income at the time it exchanged them for plaintiff's stock; that the rule enunciated in Commissioner v. P.G. Lake, Inc.
requires attribution of ordinary income to the partnership at the time of the exchange; that the assignment-of-income doctrine requires its predecessor to recognize income as amounts are collected by plaintiff; that attribution of collections to plaintiff is improper because inconsistent with its accrual method of accounting; and that the individual partners should be responsible for the accounts receivable because the amount of plaintiff's stock which each partner received was allocated pursuant to proportional interests in the partnership's capital account rather than with reference to individual shares in transferred income items. These points will be discussed seriatim.
The meaning of "property" is not defined by Section 351; however, known inclusions and exclusions suggest that the term encompasses whatever may be transferred,
including accounts receivable. Burke, Section 351: The Beginning of Life in Subchapter C, 1970, 24 Sw. L.J. 742, 747-48; see Bongiovanni v. Commissioner, 470 F.2d 921 (2 Cir., 1972); P. A. Birren & Son, Inc. v. Commissioner, 7 Cir. 1940, 116 F.2d 718; Peter Raich, 1966, 46 T.C. 604; Pittsfield Coal & Oil Company, Incorporated, 1966, T.C. Memo 4, 25 CCH Tax Ct. Mem. 11; Arthur L. Kniffen, 1962, 39 T.C. 553; Ezo Products Company, 1961, 37 T.C. 385; Thomas W. Briggs, 1956, T.C. Memo 86, 15 CCH Tax Ct. Mem. 440; Wobbers, Incorporated, 1932, 26 B.T.A. 322; Charles F. Meagher, 1930, 20 B.T.A. 68; cf. Halliburton v. Commissioner, 9 Cir. 1935, 78 F.2d 265, 268-70; American Bantam Car Company, 11 T.C. 397, 403, aff'd per curiam, 3 Cir. 1949, 177 F.2d 513, cert. denied, 1950, 339 U.S. 920, 70 S. Ct. 622, 94 L. Ed. 1344. But see Merchants Bank Bldg. Co. v. Helvering, 8 Cir. 1936, 84 F.2d 478, 481; Note, Section 351 of the Internal Revenue Code and "Mid-Stream" Incorporations, 1969, 38 U. Cin. L. Rev. 96, 106-07. There is a compelling reason to construe "property" to include potential income items: a new corporation needs working capital, and accounts receivable can be an important source of liquidity. Cf. Halliburton v. Commissioner, 9 Cir. 1935, 78 F.2d 265, 269-70; Bittker, The Corporation and the Federal Income Tax: Transfers to a Controlled Corporation, 1959 Wash. U.L.Q. 1, 7.
Lake is not on point because it does not involve the issue of income recognition upon the exchange of an item of potential income for stock in a controlled corporation. H. B. Zachry Company, 1967, 49 T.C. 73, 79-80. As the legislative history of a predecessor to Section 351
the purpose of the provision is to facilitate movement into the corporate form by preventing immediate recognition of gain or loss when there has been a mere change in the form of ownership. Helvering v. Cement Investors, Inc., 1942, 316 U.S. 527, 533, 86 L. Ed. 1649, 62 S. Ct. 1125; Bongiovanni v. Commissioner, 470 F.2d 921 (2 Cir. 1972); Estate of Walling v. Commissioner, 3 Cir. 1967, 373 F.2d 190, 194; Mather & Co. v. Commissioner, 3 Cir., 171 F.2d 864, cert. denied, 1949, 337 U.S. 907, 69 S. Ct. 1049, 93 L. Ed. 1719; Portland Oil Co. v. Commissioner, 1 Cir., 109 F.2d 479, 488, cert. denied, 1940, 310 U.S. 650, 60 S. Ct. 1100, 84 L. Ed. 1416. Therefore, when a cash-method taxpayer transfers accounts receivable to a controlled corporation solely in exchange for securities therein, the recognition of any gain realized upon the exchange is deferred. Arthur L. Kniffen, 1962, 39 T.C. 553; Charles F. Meagher, 1930, 20 B.T.A. 68. This best comports with the policy of Section 351. Dauber, Accounts Receivable in Section 351 Transactions, 1966, 52 A.B.A.J. 92; Hickman, Incorporation and Capitalization, 1962, 40 Taxes 974, 979; Riebesehl, Tax-Free Incorporations Under Section 351, 1968, 46 Taxes 360.
However, the question of non-recognition upon the exchange itself is distinct from the issue whether the partnership or the corporation is taxable when collections upon transferred receivables are made. H. B. Zachry Company, 1967, 49 T.C. 73, 80 n. 5. Plaintiff contends that such amounts are properly attributable to its predecessor at the time of collection because the partnership performed all the services upon which the right to payment depends.
There is a tension which inheres in Section 351: although its animating concept is that of a mere change in form of ownership, the act of incorporation yields an entity distinct from its predecessor which may independently select many of its characteristics, e.g., its accounting period and its methods of accounting, depreciation and inventory valuation. White, Sleepers That Travel With Section 351 Transfers, 1970, 56 Va. L. Rev. 37. Therefore, it would be erroneous to assume that the assignment-of-income doctrine is necessarily inapplicable. Biblin, Assignments of Income in Connection with Incorporating and Liquidating Corporations, 1969, 21 U. So. Cal. Tax Inst. 383, 385-87. However, for reasons to be enumerated, the court holds that Hempt Bros., Inc. is properly taxable upon collections made with respect to accounts receivable which have been transferred to it in conjunction with the Section 351 incorporation of a going business by a cash-method partnership for a legitimate business purpose.
The market value of the receivables notwithstanding, they had a basis of zero to the partnership because no collections were made prior to the transfer. Bongiovanni v. Commissioner, 470 F.2d 921 (2 Cir. 1972); P. A. Birren & Son, Inc. v. Commissioner, 7 Cir. 1940, 116 F.2d 718, 720; Peter Raich, 1966, 46 T.C. 604, 610; Note, Section 357(c) and the Cash Basis Taxpayer, 1967, 115 U. Pa. L. Rev. 1154, 1165. Since the exchange was solely for stock, plaintiff's carry-over basis was also zero. Int. Rev. Code of 1954, Section 362(a), as construed in, e.g., Ezo Products Company, 1961, 37 T.C. 385, 392-93. Upon collection, plaintiff realized income which it must recognize to the extent that the amounts received exceed basis. P. A. Birren & Son, Inc. v. Commissioner, 7 Cir. 1940, 116 F.2d 718, 720; Thomas W. Briggs, 1956, T.C. Memo 86, 15 CCH Tax Ct. Mem. 440; accord, Divine v. United States, W. D. Tenn. 1962, 62-2 U.S. ...