The corporation accepted the foregoing offers of Heinz Schmidt, Leimbrock, and Grisay at a special meeting of its board of directors on August 10, 1959.

Subsequent to the transfer of the proprietorship's business the corporation continued the same operations as that of the proprietorship.

The amounts of accounts receivable, sales 1964 U.S. Tax Ct. LEXIS 36">*42 on account, additions to the reserve for bad debts, and writeoffs against the reserve for bad debts, by the corporation for the 3 years subsequent to the foregoing transfer were as follows: 42 T.C. 1130">*1133

The accounts receivable of both the proprietorship and the corporation were 30-day accounts with maximum credit extending to 90 or 120 days.

An application by the corporation to the commissioner of corporations of California bearing the date November 23, 1959, indicated that the corporation proposed to issue 8,400 shares of stock as follows:

From June 29, 1959, to May 3, 1960, Heinz was the owner of 600 shares of the corporation's stock, such stock representing all of the corporation's then outstanding stock.

From May 3, 1960, to June 30, 1962, the corporation's 1964 U.S. Tax Ct. LEXIS 36">*43 stock was owned as follows:

Heinz and Charlotte reported taxable income for 1958 and 1959 in the amounts of $ 27,957.98 and $ 48,279.28, respectively.

OPINION

The sole issue before us is whether the balance in the proprietorship's reserve for bad debts account in the amount of $ 27,445.71, as of June 30, 1959, was includable in petitioners' taxable income in 1959 when, on June 30, 1959, the business of the proprietorship, including accounts receivable, was transferred to the corporation in a transaction which qualified for nonrecognition under section 351. ^{21964 U.S. Tax Ct. LEXIS 36">*45 1964 U.S. Tax Ct. LEXIS 36">*46} The Government concedes that the transfer qualifies under section 351 and it does not challenge the amount in the reserve for bad debts as of June 30, 1959, as an unreasonable one. However, 42 T.C. 1130">*1134 its position is that when the proprietorship terminated, the need for maintaining the reserve for bad debts ceased and therefore the balance in the account at the time of termination should be restored to income. Petitioners, on the other hand, contend that 1964 U.S. Tax Ct. LEXIS 36">*44 no restoration of income in respect of the balance in the reserve for bad debts account should be made because all of the assets of the proprietorship, including accounts receivable subject to the reserve for bad debt, were transferred to a corporation in a tax-free exchange under section 351 and the transferee carried on the business of the transferor and maintained the foregoing accounts receivable and reserve for bad debts in the same manner as had petitioners. For reasons hereinafter stated, we agree with the Government.

The Government's position follows Rev. Rul. 62-128, 1962-2 C.B. 139, ^{31964 U.S. Tax Ct. LEXIS 36">*48} and is in accord with our decision in West Seattle National 42 T.C. 1130">*1135 , 33 T.C. 341">33 T.C. 341, affirmed 288 F.2d 47 (C.A. 9). In the West Seattle case the corporate taxpayer disposed of all its business in a tax-free transaction pursuant to a plan of complete liquidation under section 337 of the 1954 Code. It had a reserve for bad debts composed of amounts added thereto from time to time which had been deducted annually from its gross income, and it was there held that when the corporation disposed of its business "there was no longer any need for the reserve, and the amount thereof should be restored to income" (33 T.C. 341">33 T.C. 343). The Court further ruled that the nonrecognition provisions of section 337 did not apply to such income. Those provisions were intended to relieve 1964 U.S. Tax Ct. LEXIS 36">*47 from tax the gain realized upon disposition of the corporation's assets, but (33 T.C. 341">33 T.C. 344) --

The income here sought to be taxed did not arise from the sale of assets. The only relation the sale of petitioner's assets had to this income is that it removed the necessity for maintaining the reserve for bad debts because petitioner no longer held receivables, the full collection of which might be doubtful.

A like result is called for in the present case. Here, too, there was a nonrecognizable transaction, and pursuant to the applicable provisions of section 351, ⁴ no gain or loss was recognized upon the transfer of the proprietorship to the corporation. The income here in question is similarly not gain upon the transfer of assets. Rather, this case, like West Seattle, involves amounts of income realized under the taxpayers' system of accounting prior to the transfer, income which had been relieved of tax by reason of offsetting 1964 U.S. Tax Ct. LEXIS 36">*49 bookkeeping entries in a reserve account; and the Commissioner's adjustment merely restored the balance in that account to income when it became clear that the reserve was no longer required by the taxpayers.

It is true, as petitioners point out, that in Citizens Federal S. & L. Ass'n of Cleveland v. United States, 290 F.2d 932 (Ct. Cl.), which followed the West Seattle case, there is a dictum (p. 937) which distinguishes a sale of the type involved therein from a nonrecognizable transaction where the same interests continue to operate the business in a different form and where the need for the reserve continues. The difficulty with that dictum, however, is that it does not appear to be based upon any statutory provision, nor have the parties herein called our attention to any statutory language providing for the carryover 42 T.C. 1130">*1136 of 1964 U.S. Tax Ct. LEXIS 36">*50 the bad debt reserve to the transferee. Although the Code contains various provisions dealing with the carryover of basis of transferred assets, ⁵ we have found none requiring or sanctioning the carryover of a bad debt reserve account into the hands of the transferee corporation in a section 351 transaction.

If the result for which petitioners contend is correct, then the transferee corporation must start out with the $ 27,445.71 reserve, without obtaining a deduction 1964 U.S. Tax Ct. LEXIS 36">*51 therefor. Such reserve would then serve as a base for determining the reasonableness of future additions thereto; and when the business is finally wound up the balance in the reserve would be restored to income in the hands of the transferee. Thus, the $ 27,445.71 balance at the time of the transfer would either be absorbed by bad debts sustained by the transferee or it would ultimately be included in income of the transferee. But we know of nothing in the statute that would require or permit any such practice, regardless of how the parties have in fact handled the matter. Such result would appear to be desirable, but we are dealing with a statute characterized by a high degree of specificity, ^{61964 U.S. Tax Ct. LEXIS 36">*52} and we must take it as we find it. In the absence of any provision for carryover of the reserve account, we must hold that an adjustment to income, otherwise proper, is not to be disapproved merely because there was a tax-free transaction pursuant to section 351. ⁷ We follow our prior decision in the West Seattle case, and hold that the revenue ruling involved herein represents a proper interpretation of the statute as it is presently formulated.

Decision will be entered for the respondent.