The Highly Avoidable Section 357(c): A Case Study in Traps for the Unwary and Some Positive Thoughts About Negative Basis
J. Clifton Fleming Jr.
Brigham Young University - J. Reuben Clark Law School
September 1, 1990
16 Journal of Corporation Law 1 (1990)
Section 357(c) is readily avoidable by any well-advised section 351 transferor who can retain the amount of liabilities that would otherwise exceed the basis of the transferred assets, who has sufficient additional property to increase the transferred assets to a point at which the basis of those assets equals the transmitted liabilities, or who can borrow and transfer cash equal to the difference between the basis of the conveyed assets and the amount of the transmitted liabilities. In this context, a section 351 transferor who gives the transferee corporation a personal note equal to the difference between the basis of the transferred assets and the amount of the transmitted liabilities should escape the reach of section 357(c) as well. To treat the transferor otherwise would mean that section 357(c) would apply to a properly advised section 351 transferor only if that transferor lacked sufficient credit standing to borrow from a third party, a result that has no obvious rationale; but if the issuance of a transferor’s personal note can avoid section 357(c), then section 357(c) is truly a trap for the unwary because it will apply only to a section 351 transferor who lacks professional advice or whose adviser fails to instruct the transferor to deliver the appropriate note to the controlled corporation.
Section 357(c) is a punitive tax provision that affects only under-advised taxpayers. Although this may be good for the employment of attorneys and accountants, it is not good tax policy; furthermore, this article explains that section 357(c) fails to solve any problem that requires a solution with respect to section 351 exchanges. Indeed, Congress’s failure in 1954 to give a clear explanation of its objective in enacting section 357(c) is now understandable. There was simply no persuasive purpose. Because of this lack of purpose for section 357(c), no desirable policy objective would be compromised by the provision’s repeal. Instead, taxpayers who transfer assets to corporations in section 351 exchanges would be well-served by such a development.
Number of Pages in PDF File: 32
Keywords: corporate taxation, income tax, corporate formation
Date posted: November 10, 2013