[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.514(d)-1]

[Page 213]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.514(d)-1  Basis of debt-financed property acquired in corporate 
liquidation.

    (a) If debt-financed property is acquired by an exempt organization 
in a complete or partial liquidation of a corporation in exchange for 
its stock, the organization's basis in such property shall be the same 
as it would be in the hands of the transferor corporation, increased by 
the amount of gain recognized to the transferor corporation upon such 
distribution and by the amount of any gain which is includible, on 
account of such distribution, in the gross income of the organization as 
unrelated debt-financed income.
    (b) The application of this section may be illustrated by the 
following example:

    Example. On July 1, 1970, T, an exempt trust, exchanges $15,000 of 
borrowed funds for 50 percent of the shares of M Corporation's stock. M 
uses $35,000 of borrowed funds in acquiring depreciable assets which are 
not used at any time for purposes described in section 514(b)(1) (A), 
(B), (C), or (D). On July 1, 1978, and for the 12-month period preceding 
this date, T's acquisition indebtedness with respect to M's stock has 
been $3,000. On this date, there is a complete liquidation of M 
Corporation to which section 331(a)(1) applies. In the liquidation T 
receives a distribution in kind of depreciable assets and assumes $7,000 
of M's indebtedness which remains unpaid with respect to the depreciable 
assets. On this date, M's adjusted basis of these depreciable assets is 
$9,000, and such assets have a fair market value of $47,000. M 
recognizes gain of $6,000 with respect to this liquidation pursuant to 
sections 1245 and 1250. T realizes a gain of $25,000 (the difference 
between the excess of fair market value of the property received over 
the indebtedness assumed, $40,000 ($47,000-$7,000) and T's basis in M's 
stock, $15,000). A portion of this gain is to be treated as unrelated 
debt-financed income. This amount is determined by multiplying T's gain 
of $25,000 by the debt/basis percentage. The debt/basis percentage is 20 
percent, the ratio which the average acquisition indebtedness ($3,000) 
is of the average adjusted basis ($15,000). Thus, $5,000 (20 percent of 
$25,000) is unrelated debt-financed income. This amount and the gain 
recognized pursuant to sections 1245 and 1250 are added to M's basis to 
determine T's basis in the property received. Consequently, T's basis in 
the property received from M Corporation is $20,000, determined as 
follows:

M Corporation's adjusted basis..............................      $9,000
Gain recognized by M Corporation on the distribution........       6,000
Unrelated debt-financed income recognized by T with respect        5,000
 to the distribution........................................
                                                             -----------
T's transferred basis.......................................      20,000



[T.D. 7229, 37 FR 28153, Dec. 21, 1972]