Free Response to Motion [Dispositive] - District Court of Federal Claims - federal

Case 1:05-cv-00231-EJD

Document 167-7

Filed 04/21/2008

Page 1 of 3

REPORT

106TlI CONGRESS L

SENATE

1s! Session f

t

106-120

TAXAYER REFU ACT OF 1999

REPORT
OFTHl:

COMMITTEE ON FINANCE UNITED STATES SENATE
TO ACCOMIAN

S. 1429

together with
MINORITY AND ADDITIONAL VIEWS
A BILL TO PROVIDE FOR RECONCILIATION pURUAN TO SECTION 104 OF THE CONCURRENT RESOLUTON ON THE BUDGET

FOR nSCAL YF.. 2000

w
.JULY 23 (legislative day, JULY 26), 1999.--rdered to be printed
U.S. GOVERNM¡,NT PRINTlNG OFFIO~ WASHINGTON' 1999

58113

;! GOVERNMENT

; EXHIBIT l Append" A6

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Case 1:05-cv-00231-EJD

Document 167-7

Filed 04/21/2008

Page 2 of 3

.I

214

if the employer maintaining the plan was not an S corporation on
ing afer July 14, 1999.

such date, the provision is effective with respect to plan years end-

8. Modiy anti-abuse rules related to assumption of liabilties (sec.
1318 ofthe bil and sec. 357 of the Code)

PRESEN LAW

Generally, no gain or loss is recognzed if property is exchanged for stock of a controlled corporation. The transferor may recognize

feror. The assumption of liabilties by the transferee generally is
a liabilty is treated as boot to the transferor, however, "rilf, taking

gain to the extent other property ("boot") is received by the tran-

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not treated as boot received by the transferor. The assumption of

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into consideration the nature of the liabilty and the circumstances in the light of which the arrangement for the assumption or acquisition was made, it appears that the pricipal purpose of the taxpayer . . . was a purpose to avoid Federal income tax on the ex-

change, or . . . if not such purpose, was not a bona fide business
purpose." Sec. 357(b). Thus, this exception requies that the pri-

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cipal purpose of havig the transferee assume the liabilty was the avoidance of tax on the exchange.

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The transferor's basis in the stock of the transferee received in the exchange is reduced by the amount of any liability assumed,
but generally increased in the amount of any

gain recognized by

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the transferor on the exchange. If the transferee assumes liabilties
in excess of the basis of assets transferred, the transferor recognizes gain in the amount of the excess. However, this gain recogni-

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as boot under the tax avoidance rule. Stock basis is reduced, however, for an assumption. For other liabilit¡",O; (where the assumption is not treated as boot under the tax avoidance rule), no gain recognition or basis reduction is required for thp. assumption of a li-

tion rule does not apply if the assumption of a liabilty is treated
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ability that would give rise to a deduction.
nizations.

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Similar rules apply in connection with certain tax-free reorgaREASONS FOR CHAGE

the assumption of liabilities may be inadequate to address the concerns that underlie the proviion, given the high standard before

The Committee is concerned that the anti-abuse rule related to

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it is applicable. A standard of "the" pricipal purpose may'be di-

ficult to prove. In addition, tapayers milY contend that the "exchange" itself is not the tax-avoidance transaction, even though the exchange may make the tax avoidance possible. As one example of a transaction that concerns tl;e Cominttee, a

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transferor corporation may transfer assets with a fair market value plus the transferee's assumption of a contingent liabilty that is deductible in the future, but capable of current valuation. The transferor claims a high basis for the stock of the transferee held with
basis (as one example, a note of another member qf the corporate group) in exchange for preferred stock of the transferee corporation,

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respect to tbis transfer, because the basis of the assets is taken

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into account, while the taxpayer contends that the assumed liabil-

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019

Case 1:05-cv-00231-EJD

Document 167-7

Filed 04/21/2008

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215

,,~; not an S corporation on respect to plan years end-

ity does not reduce stock basis under current law. However, the value of the transferee stock in the hands of the transferor is nomi-

mmption of liabilities (sec.
fiile)

nal, because of the liability that offsets viualy all the value of the assets. The transferor may then attempt to accelerate the deduction that would be attributable to the liability, by selling or ex-

chagig the transferee stock at a loss. Furthermore, the trans-

:,;ieror. The assumption of

c I if property is exchanged : transferor may recognize ) is received by the transli~ transferee generaly is

tion 357(b) is desirable, to afect transactions where the taxpayer
"a pricipal purose" of tax avoidance even though it is outweighed

feree (which may stil be a member of the consolidated group fing a tax return with the transferor) might take the position that it is entitled to deduct the payments on the liabilty, effecively duplicating the deduction attributable to the liabilty. The Commtte believes that a change in the stadard under sec-

£;,'or, however, "liJf, tag Iity and the circumstances

has "a principal purpose" of ta avoidance. A taxpayer may have
by other purposes (taken together or separately).
EXLAATION OF PROVIION

wI income tax on the ex: not a bona fide business
"l requires that the pri-

,'aie assumption or acquiIJcip.al purpose of the tax-

The provision deletes the liitation that the assumption of liabilities anti-abuse rue only applies to tax avoidance on the exchange
itself, and changes ''the principal purose" standard to "a principal
purose." The provision also afect the basis rue that requies a

mme the liability was the
;JIP t. w;feree received in of a'.j liability assumed i' ~ny gain recognized bÝ :ideree assumes liabilities
n:ù, the tr.ansf~ror recog-

treated as boot under the anti-abuse rule.75 ~FFECTI DATE
July 15, 1999.

decrease in the transferor's basis in the transferee's stock when a liabilty, the payment of which would give rise to a deduction, is

iC!. basis is reduced, howl'.~; (where the assumption IOHnce r'!lo.), no gain rec-

III of a liability is treated
1 the as'tumption of a Ii-

o.vever, ~hi~ .gai~ recogni-

The provision is effective for assumptions of liabilities on or after
9. Require consistent treatment and provide basis allocation rules
for transfers of intangibles in certain nonrecognition transthe Code) the bil and secs. 351 and 721 of actions (sec. 1319 of

PRESENT LAW
Generally, no gai or loss is recognized if one or more persons transfer property to a corporation solely in exchange for stock in

l certain tax-free reorga-

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uti-abuse rule related to
ipal purpose may be difW contend that the "exi~action, even though the able.
r¡iiate to address the con;.he high standard before

the corporation and, immediately afer the exchange such person or persons are in control of the corporation. Similarly, no gain or loss is recognized in the case of a contribution of property in exchange for a partnership interest. Neither the Internal Revenue Code nor

the regulations provide the meaning of the requirement that a person "transfer property" in exchange for stock (or a parnership interest). The Internal Revenue Servce interprets the requirement consistent with the "sale or other disposition of property" language
in the context of a taxable disposition of property. See, e.g., Rev.

iicerns the Committee a with a fair market vaÍue iiiember of the corporate
l~ transferee corporation

Rul. 69-156, 1969-1 C.B. 101. Thus, a transfer of less than "all
substantial rights" to use property will not qua1ify as a

'tax-free ex-

change and stock received wil be treated as payments for the use
of property rather than for the property itself.

These amounts are

'il~ valuation. The transi.lie transferee held with
; of the assets is taken

¡gent liability that is d~

characterized as ordinary income. However, the Claims Court has
rejected the Servce's position and held that the transfer of a non-

76Section 357(b)(i) liabilities are not witlun the scope of section 357(c)(3) or section 358d)(2).
Thus. the tranferee's 888umption of a liability under section 357(b)(l). 8B modified hy the provi.

that the assumed liabil-

sion, is treate 8. the tranferor'a receipt of money for purses of 358 and related provisioJ1.

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