More on Accounting for the Assumption of Contingent Liabilities on the Sale of a Business

This comment will explore Professor Halperin's underlying assumptions regarding contingent liabilities and examine the stakes involved in fashioning tax accounting rules that rely upon them. It will attempt to demonstrate that at least some liabilities, including some contingent liabilities, are different from the liabilities upon which Professor Halperin's analysis is based. This difference may not easily be accommodated in an income tax based on realization. Nevertheless, this difference may undermine both the assumption that there is a legitimate reason for deferring a payor's deduction until the ultimate payee is known and has been taxed, and may make it substantially more difficult to establish an appropriate value for the liability in advance of payment.

My disagreement with Professor Halperin about the variations among contingent liabilities has little practical consequence if (as may well be the case) workable tax accounting rules cannot be fashioned to accommodate the differences among such liabilities and other deferred payments. It may also be true that failing to deal with these cases separately will not produce intolerable results. Nevertheless, I fear that some readers may ignore his conclusions because, from their point of view, he seems to be concerned only with the easy cases for which his assumptions seem reasonable. Since Professor Halperin's analysis does not appear to have taken these harder cases into account, readers who are concerned primarily with the harder cases are likely to reject his analysis too quickly.

When Professor Halperin ignores the variations among contingent liabilities, he may make it too easy for critics to reject his conclusions as extreme.