74 T.C. 441 (1980)
BUFFALO TOOL & DIE MANUFACTURING CO., INC., TRANSFEROR, PETER HOSTA, JR., and ELEANOR HOSTA, TRANSFEREES, PETITIONERS
COMMISSIONER of INTERNAL REVENUE, RESPONDENT
United States Tax Court
May 27, 1980
Individual petitioners H and W are liable as transferees of Corporation B, which sold all its machinery for a lump sum to a syndicate of used machinery dealers pursuant to a plan to liquidate the corporation within 12 months. At closing, H, on behalf of B, presented a letter to the syndicate containing an alleged allocation of the sales price. The syndicate resold most of the machinery in an auction held 21; 2 months later, and the remainder in individual sales. Held, in calculating depreciation recapture, the allocation contained in the letter was neither realistic nor the result of arm's-length negotiations and is therefore not binding on respondent. Held, further, all of the items sold by B will not be treated as a single item for purposes of depreciation recapture. BASF Wyandotte Corp. v. Commissioner, 62 T.C. 704 (1974), affd. 532 F.2d 530 (6th Cir. 1976), distinguished. Held, further, respondent's valuation method, applying a single percentage factor to reduce subsequent auction and individual sale prices, is not binding on petitioners.
Paul R. Comeau and Victor T. Fuzak, for the petitioners.
Louis J. Zeller, Jr., for the respondent.
Respondent determined a deficiency in the corporate income tax for 1973 of the transferor, Buffalo Tool & Die Manufacturing Co., Inc. (hereinafter Buffalo Tool or the corporation), of $403,541, based upon adjustments for depreciation recapture under section 1245. He determined that petitioners Peter Hosta, Jr. (hereinafter Hosta), and Eleanor Hosta are liable as transferees of Buffalo Tool as follows:
By amendment to answer, respondent redetermined the transferor's deficiency to be $653,979.64 and asserted a transferee Page 442
liability against Hosta in that amount; he also increased the asserted transferee liability against Eleanor Hosta to $323,000.
At trial, the Court severed certain issues relating to the allocation of the overall purchase price to individual pieces of machinery.
The issues presented herein for resolution are whether, on the basis of the record thus far developed, (a) Buffalo Tool's allocation of the purchase price should be binding upon respondent, (b) the sale of the machinery should be treated as a bulk sale for purposes of applying the depreciation recapture provisions, and (c) respondent's allocation of the purchase price, which was based upon applying a percentage factor to the amounts received by the purchaser on subsequent resales of the machinery, should be binding upon petitioners. FINDINGS OF FACT The individual petitioners resided in Athol Springs, N.Y., at the time the petition herein was filed. During 1973, Buffalo Tool was a corporation organized under the laws of the State of New York with its principal place of business in Buffalo, N.Y. It filed its income tax return for 1973 with the North Atlantic Service Center, Andover, Mass., on March 4, 1974. Hosta founded Buffalo Tool in 1942. During 1973, he owned 86.32 percent of the stock of Buffalo Tool; Eleanor Hosta owned the remaining 13.68 percent. Hosta served as its president, Eleanor Hosta as its secretary, and Floyd G. Wehrlin was the vice president. The board of directors consisted of Hosta, Eleanor Hosta, and Geoffrey Hosta. Buffalo Tool's primary business was the manufacture of tools and dies to be used in automotive production. During 1972, Hosta decided to discontinue the business of the corporation. He first attempted to sell Buffalo Tool as a going business, placing advertisements in the Wall Street Journal. Such efforts proved unsuccessful, so he concentrated on selling the machinery of the corporation, together with the land and building whereon the machinery was located, which was owned by the individual petitioners. Hosta was unwilling to sell the building and land separate Page 443
from the machinery, because he thought it impractical to move the machinery and store it for the period of time that might be necessary to get a fair price for it. He refused to sell the machinery piecemeal, because he feared any piece he might sell would be the key to a sale of a larger, or even the entire, lot. During the late summer of 1972, Hosta was approached by a group of prospective purchasers, who eventually purchased the machinery and the realty. The primary business of the members of this group (hereinafter the syndicate or purchasers) was the purchase and resale of used machinery. Some members of the syndicate examined the machinery at that time but rejected the asking price as too high. Hosta provided them with an inventory list of the machinery without any prices for individual items contained therein. During the first quarter of 1973, the syndicate again became interested in acquiring the property. Meetings were held between Hosta and representatives of the syndicate, including Joseph and Bill O'Connell of O'Connell Machinery Co., Leonard Morey of Morey Machinery Co., and Harold Goldstein of Cadillac Machinery Co. Harold Goldstein conducted the negotiations on behalf of the syndicate. Hosta rejected an offer by the syndicate to simultaneously purchase the real estate in one name and the machinery in another, requiring them to take the whole package as one buyer. On March 16, 1973, Hosta and the syndicate reached agreement on a sales price of $2,600,000 for the machinery and $350,000 for the land and building, or $2,950,000 in total.
No further negotiations were conducted regarding either the sales price or the allocation of the price. On March 21, 1973, Buffalo Tool's board of directors met and resolved to sell substantially all of the corporation's assets and adopted a plan to liquidate the corporation within 12 months. That evening, the individual petitioners and Buffalo Tool as sellers and David J. Kayner (hereinafter Kayner) as nominee for the purchasers
signed an agreement for the sale of all of the Page 444
assets of Buffalo Tool (except cash and office furniture), together with the land and building. Prior to the signing of the agreement, while the final draft was being retyped, Hosta's attorney presented Kayner with a letter, for his signature, stating that the parties agreed to an allocation of $350,000 to the land and building and of $2,600,000 to the personal property, as was set forth in the attached schedule. The schedule included an inventory of the major machinery items, with alleged sales prices (allegedly equal to fair market value) for each item.
Goldstein told Kayner to sign the letter. Kayner did so only after calling his law office in Chicago, which made sure that the allocations would not be inconsistent with their...