T.C. Memo. 2001-99
UNITED STATES TAX COURT
SEGGERMAN FARMS, INCORPORATED, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 16269-99, 16271-99, Filed April 25, 2001.
16272-99, 16273-99.
David E. Alms, for petitioners.
David S. Weiner, for respondent.
MEMORANDUM OPINION
COHEN, Judge: Respondent determined the following
deficiencies in petitioners’ Federal income tax:
1
Cases of the following petitioners are consolidated
herewith: Craig and Linda Seggerman, docket No. 16271-99;
Michael Seggerman, docket No. 16272-99; and Ronald and Sally
Seggerman, docket No. 16273-99.
- 2 -
Docket No. 1993 1994 1995
16269-99 $1,059 $3,176 $19,431
16271-99 24,436 5,663 -0-
16272-99 24,058 2,654 -0-
16273-99 104,847 4,867 -0-
After concessions by the parties, the remaining issue for
decision is whether petitioners must recognize a gain on the
transfer of assets to Seggerman Farms, Incorporated, under
section 357 to the extent that the amount of liabilities that
were assumed plus the amount of liabilities to which the property
was subject exceeds the total of the adjusted basis of the
property that was transferred to the corporation.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
Background
These cases were submitted fully stipulated under Rule 122.
The stipulated facts are incorporated as our findings by this
reference.
Petitioners Ronald and Sally Seggerman, Craig and Linda
Seggerman, and Michael Seggerman, hereinafter collectively
referred to as petitioners, resided in Illinois at the time they
filed their petitions. Petitioner Seggerman Farms, Incorporated
(Seggerman Farms), was an Illinois corporation, and its principal
- 3 -
place of business was Minonk, Illinois, at the time the petition
was filed.
Before January 1, 1993, Ronald Seggerman and his sons, Craig
Seggerman and Michael Seggerman, operated a grain and cattle farm
as a joint venture and reported their respective shares of income
and expenses from the farm operations on Schedule F, Profit or
Loss From Farming.
On March 19, 1993, Ronald Seggerman incorporated Seggerman
Farms. The stock of Seggerman Farms was distributed as follows:
100 preferred shares and 38 common shares to Ronald Seggerman,
4 common shares to Sally Seggerman, 30 common shares to Craig
Seggerman, 3 common shares to Linda Seggerman, and 25 common
shares to Michael Seggerman.
In early 1993, Ronald Seggerman, Craig Seggerman, and
Michael Seggerman transferred property to Seggerman Farms.
Ronald Seggerman transferred the following assets to Seggerman
Farms:
- 4 -
Asset Description Adjusted Basis Fair Market Value
Depreciable property $53,601 $143,760
Inventory -0- 120,980
Fertilizer & lime -0- 1,360
Hay, straw, & oats -0- 7,340
Market livestock -0- 7,500
Cattle feed -0- 900
Gas & diesel -0- 1,400
Miscellaneous tools -0- 3,000
Land, building, & grain 10,000 140,180
Cash 2,600 2,600
Improvements to Craig
Seggerman’s house -0- 1,400
Accounts receivable -0- 1,440
Deficiency payments -0- 13,960
Total 66,201 445,820
Either the property that was transferred was subject to
liabilities or Seggerman Farms assumed the liabilities from
Ronald Seggerman in the amount of $402,903 as follows:
Amount of
Creditor Liability
Minonk State Bank $259,370
Ford Motor Co. 11,533
Federal Land Bank 132,000
Total 402,903
The amount of the liabilities that were transferred to Seggerman
Farms by Ronald Seggerman exceeded the adjusted basis of the
assets that he transferred to Seggerman Farms by $336,702. The
portion of this gain that was attributable to long-term capital
gain was $206,751, and the portion attributable to ordinary gain
was $129,951.
Craig Seggerman transferred the following assets to
Seggerman Farms:
- 5 -
Asset Description Adjusted Basis Fair Market Value
Depreciable property $27,457 $71,880
Inventory -0- 60,490
Fertilizer & lime -0- 680
Hay, straw, & oats -0- 3,670
Market livestock -0- 3,750
Cattle feed -0- 450
Gas & diesel -0- 700
Miscellaneous tools -0- 1,500
Cash 3,060 3,060
Improvements to Craig
Seggerman’s house -0- 700
Accounts receivable -0- 720
Deficiency payments -0- 6,980
Deposits -0- 1,760
Total 30,517 156,340
Either the property that was transferred was subject to
liabilities or Seggerman Farms assumed the liabilities from Craig
Seggerman in the amount of $121,911 as follows:
Amount of
Creditor Liability
Minonk State Bank $98,355
Ford Motor Co. 5,766
Ray Seggerman 17,790
Total 121,911
The amount of the liabilities that were transferred to Seggerman
Farms by Craig Seggerman exceeded the adjusted basis of the
assets that he transferred to Seggerman Farms by $91,394. The
portion of this gain that was attributable to long-term capital
gain was $47,227, and the portion that was attributable to
ordinary gain was $44,167.
Michael Seggerman transferred the following assets to
Seggerman Farms:
- 6 -
Asset Description Adjusted Basis Fair Market Value
Depreciable property $27,457 $71,880
Inventory -0- 60,490
Fertilizer & lime -0- 680
Hay, straw, & oats -0- 3,670
Market livestock -0- 3,750
Cattle feed -0- 450
Gas & diesel -0- 700
Miscellaneous tools -0- 1,500
Cash 3,060 3,060
Improvements to Craig
Seggerman’s house -0- 700
Accounts receivable -0- 720
Deficiency payments -0- 6,980
Deposits -0- 1,760
Total 30,517 156,340
Either the property that was transferred was subject to
liabilities or Seggerman Farms assumed the liabilities from
Michael Seggerman in the amount of $113,111 as follows:
Amount of
Creditor Liability
Minonk State Bank $89,555
Ford Motor Co. 5,766
Ray Seggerman 17,790
Total 113,111
The amount of the liabilities that were transferred to Seggerman
Farms by Michael Seggerman exceeded the adjusted basis of the
assets that he transferred to Seggerman Farms by $82,594. The
portion of this gain that was attributable to long-term capital
gain was $42,827, and the portion attributable to ordinary gain
was $39,767.
- 7 -
After the section 351 transaction, Seggerman Farms
refinanced a portion of the transferred debt. Seggerman Farms
incurred the following debts:
Amount of
Creditor Loan No. Liability
Minonk State Bank 90780 $200,030
Minonk State Bank 01260 130,000
In addition, Seggerman Farms, Ronald and Sally Seggerman, Craig
and Linda Seggerman, and Michael Seggerman borrowed the following
as comakers:
Amount of
Creditor Loan No. Liability
Minonk State Bank 90777 $162,000
Minonk State Bank 90779 245,000
Petitioners remained personally liable on all of the debt
that was assumed by Seggerman Farms, or to which the property
that was received by Seggerman Farms was subject, both before and
after the section 351 transfer of property to Seggerman Farms.
Ronald Seggerman executed a commercial guaranty of Seggerman
Farms’ debt to Minonk State Bank. Sally Seggerman, Craig
Seggerman, Linda Seggerman, and Michael Seggerman executed
unlimited, continuing personal guaranties of Seggerman Farms’
debt to Minonk State Bank. None of the loan proceeds were
disbursed directly to petitioners.
- 8 -
Discussion
The sole issue for decision is whether petitioners must
recognize a gain on the transfer of assets to Seggerman Farms
under section 357 to the extent that the amount of liabilities
that were assumed plus the amount of liabilities to which the
property was subject exceeds the total of the adjusted basis of
the property that was transferred to the corporation.
Petitioners argue that, because they were not relieved
personally from any debt that the corporation assumed or to which
transferred property was subject or that was refinanced pursuant
to restructuring of corporate debt, they should not have to
recognize gain on the amount of the liabilities that exceeds the
adjusted basis of the transferred assets.
Section 357(c) provides, in part:
SEC. 357(c). Liabilities in Excess of Basis.--
(1) In general.--In the case of an exchange--
(A) to which section 351 applies * * *
* * * * * * *
if the sum of the amount of the liabilities assumed,
plus the amount of the liabilities to which the
property is subject, exceeds the total of the adjusted
basis of the property transferred pursuant to such
exchange, then such excess shall be considered as a
gain from the sale or exchange of a capital asset or of
property which is not a capital asset, as the case may
be.
In Rosen v. Commissioner, 62 T.C. 11 (1974), affd. without
published opinion 515 F.2d 507 (3d Cir. 1975), we addressed the
- 9 -
same issue in similar circumstances. The taxpayer transferred
all of the assets and liabilities of a sole proprietorship to a
corporation in which he owned 100 percent of the outstanding
stock. The liabilities exceeded the adjusted basis of the assets
that were transferred, and the taxpayer remained personally
liable for the liabilities that were transferred to the
corporation. We stated that, “While the * * * [taxpayer]
nevertheless remained personally liable for the payment of such
liabilities, * * * there is no requirement in section 357(c)(1)
that the transferor be relieved of liability” and held that the
taxpayer had to recognize a gain under section 357(c) to the
extent that the liabilities that were assumed by the corporation,
or the liabilities to which the property that was transferred
might be subject, exceeded the taxpayer’s basis for the assets
that were transferred. Id. at 18-19.
Since the decision in Rosen, the Court has consistently held
that, even if the taxpayer remains liable on the transferred
debt, the taxpayer must recognize a gain under section 357(c) to
the extent that the sum of the amount of the liabilities that
were assumed, plus the amount of the liabilities to which the
property was subject, exceeds the taxpayer’s adjusted basis in
the assets that were transferred. See Smith v. Commissioner, 84
T.C. 889, 909 (1985), affd. without published opinion 805 F.2d
1073 (D.C. Cir. 1986); Owen v. Commissioner, T.C. Memo. 1987-375,
- 10 -
affd. 881 F.2d 832, 835 (9th Cir. 1989); Beaver v. Commissioner,
T.C. Memo. 1980-429; see also sec. 1.357-2(a), Income Tax Regs.
Petitioners rely on two Court of Appeals decisions, in which
the Courts of Appeals granted taxpayers relief from recognizing a
gain under section 357(c). In Lessinger v. Commissioner, 872
F.2d 519 (2d Cir. 1989), revg. 85 T.C. 824 (1985), the difference
between the adjusted basis of the assets that were transferred
and the liabilities that were transferred to the corporation was
recorded as a loan receivable from the taxpayer to the
corporation. The Court of Appeals held that, “where the
transferor undertakes genuine personal liability to the
transferee, ‘adjusted basis’ in section 357(c) refers to the
transferee’s basis in the obligation, which is its face amount.”
Id. at 526. As a result of the inclusion of the face value of
the loan receivable in the adjusted basis of the assets that were
transferred, there was no gain to recognize under section 357(c).
See id.
In Peracchi v. Commissioner, 143 F.3d 487 (9th Cir. 1998),
revg. T.C. Memo. 1996-191, the difference between the adjusted
basis of the assets that were transferred and the liabilities
that were transferred to the corporation was recorded as a
personal note from the taxpayer to the corporation. The Court of
Appeals held that the taxpayer had a basis in the personal note
- 11 -
equal to the face value of the note and that there was no gain to
recognize under section 357(c). See id. at 496.
Respondent argues that the structure of petitioners’ section
351 transaction was not the same as the structure of the
taxpayers’ transactions in Lessinger and Peracchi in that
petitioners did not contribute loan receivables or personal notes
to Seggerman Farms that would cover the difference between the
transferred liabilities and the adjusted basis of the transferred
property. Petitioners argue that their personal guaranties of
corporate indebtedness are the equivalent of loans receivable or
personal notes to the corporation because they remained liable
for the corporate debt even after the section 351 transaction.
We agree with respondent. Petitioners’ personal guaranties
of corporate debt are not the same as incurring indebtedness to
the corporation because a guaranty is merely a promise to pay in
the future if certain events should occur. Petitioners’
guaranties do not constitute economic outlays. Cf. Estate of
Leavitt v. Commissioner, 875 F.2d 420, 422 (4th Cir. 1989)
(taxpayers experienced no such call as guarantors, engaged in no
economic outlay, and suffered no cost), affg. 90 T.C. 206 (1988);
Brown v. Commissioner, 706 F.2d 755, 756 (6th Cir. 1983) (“the
courts have consistently required some economic outlay by the
guarantor in order to convert a mere loan guaranty into an
investment”), affg. T.C. Memo. 1981-608 (1981). Petitioners are
- 12 -
contingently liable only to the secured creditors of Seggerman
Farms, namely Minonk State Bank.
Although the Court of Appeals for the Seventh Circuit, to
which these cases are appealable, has not decided a case squarely
on point, that court refused to give a restrictive interpretation
to the statute and denied relief to a taxpayer with a section
357(c) gain in Testor v. Commissioner, 327 F.2d 788 (7th Cir.
1964), affg. 40 T.C. 273 (1963). In Testor, a taxpayer
transferred the assets and the liabilities of his sole
proprietorship to a corporation. The liabilities were assumed by
the corporation and were in excess of the aggregate book value of
the assets that were transferred. None of the assets were
specifically encumbered by the liabilities, and for that reason
the taxpayer argued that section 357(c) did not apply. In
interpreting section 357(c), the Court of Appeals affirmed the
decision of the Tax Court and held that “both the language and
legislative history indicate that section 357(c) is meant to
apply wherever liabilities are assumed or property is transferred
subject to liability.” Id. at 790. The taxpayer was liable for
tax on the gain under section 357(c).
Petitioners contend that their secured creditors insisted
that they incorporate in order to restructure their business debt
and procure additional credit for the upcoming crop season.
Petitioners maintain that they realized no personal net gain and
- 13 -
no relief from their financial burdens as a result of the section
351 transaction and that the recognition of gain is unfair under
these circumstances. Despite the reasons for or the results of
petitioners’ section 351 transaction, petitioners are responsible
for the tax consequences. The U.S. Supreme Court has observed
repeatedly that, “while a taxpayer is free to organize his
affairs as he chooses, nevertheless, once having done so, he must
accept the tax consequences of his choice, whether contemplated
or not, * * * and may not enjoy the benefit of some other route
he might have chosen to follow but did not.” Commissioner v.
National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149
(1974) (citations omitted).
In 1999, Congress enacted changes to section 357(c) that
were effective for transactions occurring after October 18, 1998.
See Miscellaneous Trade and Technical Corrections Act of 1999,
Pub. L. 106-36, sec. 3001(e), 113 Stat. 127, 184. The amendment
struck the words ”plus the amount of liabilities to which the
property is subject,” from section 357(c)(1) and essentially
provided relief for the taxpayer who transferred assets subject
to liabilities and remained personally liable on the debt, but
where the corporation did not assume the liability. Id. sec.
3001(d)(4), 113 Stat. 182. Congress also added section 357(d),
which provides guidance in determining the amount of liabilities
that are assumed and states in section 357(d)(1)(A) that “a
- 14 -
recourse liability (or portion thereof) shall be treated as
having been assumed if * * * the transferee has agreed to, and is
expected to, satisfy such liability (or portion), whether or not
the transferor has been relieved of such liability”. Id. sec.
3001(b), 113 Stat. 182.
The 1999 amendment does not apply to these cases, because
the transactions in these cases occurred in 1993. Even if
section 357(d)(1)(A) as enacted in 1999 did apply, petitioners’
personal liability on the debt that was transferred to the
corporation would continues to be irrelevant. Even after
congressional amendments to section 357, Congress has refrained
from providing relief to taxpayers in petitioners’ situation.
We conclude that under section 357 petitioners must
recognize a gain on the transfer of assets to Seggerman Farms.
To reflect the foregoing and concessions of the parties,
Decisions will be entered
under Rule 155.