[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.357-1]

[Page 237-238]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.357-1  Assumption of liability.

    (a) General rule. Section 357(a) does not affect the rule that 
liabilities assumed are to be taken into account for the purpose of 
computing the amount of gain or loss realized under section 1001 upon an 
exchange. Section 357(a) provides, subject to the exceptions and 
limitations specified in section 357 (b) and (c), that--
    (1) Liabilities assumed are not to be treated as ``other property or 
money'' for the purpose of determining the amount of realized gain which 
is to be recognized under section 351, 361, 371, or 374, if the 
transactions would, but for the receipt of ``other property or money'' 
have been exchanges of the type described in any one of such sections; 
and
    (2) If the only type of consideration received by the transferor in 
addition to that permitted to be received by section 351, 361, 371, or 
374, consists of an assumption of liabilities, the transaction, if 
otherwise qualified, will be deemed to be within the provisions of 
section 351, 361, 371, or 374.
    (b) Application of general rule. The application of paragraph (a) of 
this section may be illustrated by the following example:

    Example. A, an individual, transfers to a controlled corporation 
property with an adjusted basis of $10,000 in exchange for stock of the 
corporation with a fair market value of $8,000, $3,000 cash, and the 
assumption by the corporation of indebtedness of A amounting to $4,000. 
A's gain is $5,000, computed as follows:

Stock received, fair market value.............................    $8,000
Cash received.................................................     3,000
Liability assumed by transferee...............................     4,000
                                                               ---------
 Total consideration received.................................    15,000
Less: Adjusted basis of property transferred..................    10,000
                                                               ---------
 Gain realized................................................     5,000



Assuming that the exchange falls within section 351 as a transaction in 
which the gain to be recognized is limited to ``other property or

[[Page 238]]

money'' received, the gain recognized to A will be limited to the $3,000 
cash received, since, under the general rule of section 357(a), the 
assumption of the $4,000 liability does not constitute ``other 
property.''

    (c) Tax avoidance purpose. The benefits of section 357(a) do not 
extend to any exchange involving an assumption of liabilities where it 
appears that the principal purpose of the taxpayer with respect to such 
assumption was to avoid Federal income tax on the exchange, or, if not 
such purpose, was not a bona fide business purpose. In such cases, the 
total amount of liabilities assumed or acquired pursuant to such 
exchange (and not merely a particular liability with respect to which 
the tax avoidance purpose existed) shall, for the purpose of determining 
the amount of gain to be recognized upon the exchange in which the 
liabilities are assumed or acquired, be treated as money received by the 
taxpayer upon the exchange. Thus, if in the example set forth in 
paragraph (b) of this section, the principal purpose of the assumption 
of the $4,000 liability was to avoid tax on the exchange, or was not a 
bona fide business purpose, then the amount of gain recognized would be 
$5,000. In any suit or proceeding where the burden is on the taxpayer to 
prove that an assumption of liabilities is not to be treated as ``other 
property or money'' under section 357, which is the case if the 
Commissioner determines that the taxpayer's purpose with respect thereto 
was a purpose to avoid Federal income tax on the exchange or was not a 
bona fide business purpose, and the taxpayer contests such determination 
by litigation, the taxpayer must sustain such burden by the clear 
preponderance of the evidence. Thus, the taxpayer must prove his case by 
such a clear preponderance of all the evidence that the absence of a 
purpose to avoid Federal income tax on the exchange, or the presence of 
a bona fide business purpose, is unmistakable.

[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6528, 26 FR 
399, Jan. 19, 1961]