Taxpayer V. 357

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Rev. Rul. 68-629, 1968- CB 154, IRC Sec(s). 357:
Case Facts: In Revenue Ruling 68-29, the taxpayer, an individual directed a sole proprietorship business. The taxpayer started the business by transferring all of the assets to the newly constructed corporation in exchange for all of the corporation’s outstanding stock. The taxpayer also assumed all of the liabilities that pertained to the sole proprietorship. When the transfer took place, the busnisses assumed liabilities exceeded the adjusted basis of the received assets. The taxpayer issued a personal promissory note to the new corporation for the amount of liabilities that exceeded the adjusted basis of the assets, to show that the assets and liability were equal. The note issued by the taxpayer was agreed to be treated as a capital contribution to the new corporation. …show more content…
The IRS stated that the Alderman’s had an adjusted basis of zero in their promissory note and had not incurred any costs. The Alderman’s should pay the amount of tax liability since the corporation takes the same basis in the note upon transfer.
Alderman’s Argument: The Alderman’s argued that the personal promissory note was issued to lid the excess liability and was paid with personal funds. Consequently, the corporation has not assumed the responsibility to pay the surpassing amount. This results in the argument that the corporation should not be taxed on the excess gain.
Tax Court Ruling: The Tax Court ruled in favor of the IRS, stating that the Alderman’s were required to pay tax on the section 357(c) gain. The Tax Court ruled that there was no incurred cost on the note by the Alderman’s, resulting in a zero basis to both the Alderman’s and the corporation. 357(c) is unchanged by a personal note and the amount that liabilities surpassed the adjusted basis of the asset must be
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