Memorandum revised
Memorandum-to-the-File
Re: Contingent Liabilities in a Section 351 Transfer Case
Facts:
An accrual basis taxpayer Charles Cho engages in a Section 351 transaction with the newly-formed Patten Corporation.
In the transaction, Cho transferred his gas station to Patten, in exchange for the stock of Patten and assumption of the contingent environmental liabilities.
The land underneath the gas station has potential environmental problems but Cho did not take any remediation to fix environmental problems before the exchange.
A year later, Patten pays a third party $100,000 for environmental clean-up costs to remediate the site.
The transaction does not have tax avoidance purpose.
Issues
The main issue encountered in this case is whether the contingent environmental liabilities assumed by Patten is a liability that would give rise to a deduction within the meaning of Internal Revenue Code (IRC) section 357 (c)(3) and whether Cho’s basis in the stock is determined by reference to Section358 (d)(1) or Section 358 (d)(2). The issue for Patten is how to determine the tax consequence based on the transaction.
Applicable Laws
The most pertinent Sections are directly cited form Code and listed as below:
IRC Section 351(a):
“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 (as defined in section 368(c) of the corporation.”
IRC Section 357(a):
“Except as provided in subsections (b) and (c) , if—
(1) the taxpayer receives property which would be permitted to be received under section 351 or 361 without the recognition of gain if it were the sole consideration, and
(2) as part of the consideration, another party to the exchange assumes a liability of the taxpayer,”
IRC Section 357(c)(3):
(A) “In general. If a taxpayer transfers, in an exchange to which section 351 applies, a liability the
Re: Contingent Liabilities in a Section 351 Transfer Case
Facts:
An accrual basis taxpayer Charles Cho engages in a Section 351 transaction with the newly-formed Patten Corporation.
In the transaction, Cho transferred his gas station to Patten, in exchange for the stock of Patten and assumption of the contingent environmental liabilities.
The land underneath the gas station has potential environmental problems but Cho did not take any remediation to fix environmental problems before the exchange.
A year later, Patten pays a third party $100,000 for environmental clean-up costs to remediate the site.
The transaction does not have tax avoidance purpose.
Issues
The main issue encountered in this case is whether the contingent environmental liabilities assumed by Patten is a liability that would give rise to a deduction within the meaning of Internal Revenue Code (IRC) section 357 (c)(3) and whether Cho’s basis in the stock is determined by reference to Section358 (d)(1) or Section 358 (d)(2). The issue for Patten is how to determine the tax consequence based on the transaction.
Applicable Laws
The most pertinent Sections are directly cited form Code and listed as below:
IRC Section 351(a):
“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 (as defined in section 368(c) of the corporation.”
IRC Section 357(a):
“Except as provided in subsections (b) and (c) , if—
(1) the taxpayer receives property which would be permitted to be received under section 351 or 361 without the recognition of gain if it were the sole consideration, and
(2) as part of the consideration, another party to the exchange assumes a liability of the taxpayer,”
IRC Section 357(c)(3):
(A) “In general. If a taxpayer transfers, in an exchange to which section 351 applies, a liability the