that he will personally satisfy $75,000 of the nonrecourse note. 351 transfer:Assume the same facts as in Example 1, except that Property A and other land owned by S are subject to nonrecourse debt of $150,000.
However, the amount of the liability treated as assumed will be reduced by the lesser of (1) the amount of the liability the owners of other assets also subject to that liability, but not contributed to the corporation, agree to and are expected to satisfy or (2) the FMV of the other assets subject to the liability (Sec. A nonrecourse liability will be treated as assumed by the transferee of any assets subject to that liability.
A recourse liability is treated as assumed if, based on all the facts and circumstances, the transferee corporation agrees, and is expected to satisfy, the liability regardless of whether the transferor has been relieved of the liability (Sec. Only liabilities actually assumed by the transferee corporation are included in computing any gain. A personal guaranty by the shareholder does not shift the liability from the corporation back to the shareholder ( Seggerman Farms, Inc., 308 F.3d 803 (7th Cir. If S had merely furnished a personal guaranty on the notes, with the corporation primarily liable, and made the monthly mortgage payments, he would have also recognized gain on the transaction. Had T assumed the $75,000 mortgage, S would recognize a $15,000 gain ($75,000 liabilities less $60,000 total basis of properties transferred). T cannot take a basis in Property A greater than the basis in the hands of the transferor ($50,000). Therefore, the total liabilities transferred ($0) did not exceed the basis of the property transferred ($60,000). Even though Property A was transferred to T, the corporation does not assume the liability to which that property was subject. S recognized no gain as a result of the Sec. S did not take the legal steps necessary to transfer the mortgage on Property A to T he remained personally liable for that mortgage and continues to make the monthly payments.
All properties are free of any liabilities except for Property A, which is subject to a $75,000 mortgage. 351 exchange, as shown in the exhibit below. 351 transfer: S transferred three properties to T Corp. Retaining a liability to avoid shareholder gain recognition in a Sec. The computation of gain in this situation is applied on a shareholder-by-shareholder basis.Įxample 1.
In that instance, the full amount of the debt assumed by the corporation is treated as cash (boot) received by the shareholder, and the shareholder recognizes gain equal to the lesser of boot received (relieved debt) or realized gain. The transfer is made to avoid tax (Sec.The transfer of debt to a corporation will create a taxable event in these three situations: 351, the transfer of debt (or the transfer of property subject to debt) is not a taxable event (Sec. However, in most cases, when a transfer of assets qualifies as tax- free under Sec. Relief of indebtedness is generally a taxable event.