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Peracchi v. C.I.R. - 143 F.3d 487 (9th Cir. 1998)

Rule:

I.R.C. § 351(a) provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation. Section 368(c) defines control as ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.

Facts:

Appellant taxpayer contributed two parcels of real estate to his closely-held corporation to comply with Nevada’s minimum premium-to-asset ratio for insurance companies. The real property was encumbered with liabilities that exceeded appellant’s basis in the properties. Appellant also executed a promissory note included as part of the exchange. The tax court held that I.R.C. § 3579(c)  made the taxpayer liable for immediate recognition of a gain in the amount of the excess of the liabilities over taxpayer’s basis in the real property and that the note given in the exchange had a basis of zero. The taxpayer appealed.

Issue:

Was a taxpayer liable for immediate recognition of a gain in the amount of the excess of the liabilities?

Answer:

No.

Conclusion:

The United States Court of Appeals for the Ninth Circuit reversed the judgment of the Tax Court, holding the note was an ordinary, negotiable, recourse obligation that was a genuine debt for tax purposes, and his basis was its face value. As such, the aggregate liabilities of the property contributed did not exceed its basis, and taxpayer was not required to recognize any § 357(c) gain.

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