TO: J Corporation
FROM: Yizhen Gong
RE: §357(c) gain IRS examination
DATE: October 13, 2014
Joe owns 100% of the stock of J Corporation. Joe plans on contributing a parcel of land to J co. having a fair market value of $1.5 million and a basis of $350,000. Further, the land is subject to a mortgage of $1.2 million. To avoid the gain that would result on this transaction, due to §357(c), Joe plans on contributing a promissory note to J Corporation of with a face value of $850,000. He claims that this note will have a basis equal to its face value thus eliminating the gain caused by §357(c).
Whether Joe’s transfer of a promissory note to its ...view middle of the document...
5 million and a basis of $350,000. Further, the land is subject to a mortgage of $1.2 million. The liability assumed by the corporate transferee ($1.2 million) would exceed the adjusted basis of the transferor's property ($350,000) by the amount of $850,000, which amount, under §357(c), must be recognized as gain to petitioners. In order to avoid this result in the present case, Joe executed a personal promissory note ($850,000) to their wholly owned corporation in an amount equal to the excess of liabilities transferred over the adjusted basis of the transferred assets. Joe claims this note will have a basis equal to its face value thus eliminating the gain caused by §357(c).
2. The major controversy in this case is the determination of the note’s basis. § 1012 provides that the basis of property is its cost except as otherwise provided in the Code. In the case of Peracchi v. Comm'r (98-1 U.S. Tax Court No. 50374), The Ninth Circuit held that Peracchi incurred cost in issuing his note because the note was enforceable by company’s creditors. However, numerous cases have held that if a partner or a shareholder or a...