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Effective Date: April 4, 2003
COORDINATED ISSUE
ALL INDUSTRIES
CONTINGENT LIABILITIES
UIL: 9300.17-00
ISSUES:
1. Whether the taxpayer satisfies the technical requirements of I.R.C. § 351.
2. Whether the transaction took place on or after October 19, 1999, such that I.R.C. §
358(h) applies.
3. Whether the contingent liability is a liability that gives rise to a deduction within the
meaning of I.R.C. § 357(c)(3) and whether the taxpayer’s basis in its stock is
determined by reference to I.R.C. § 358(d)(1) or I.R.C. § 358(d)(2).
4. Whether the liability assumption should be treated as money received under I.R.C. §
357 (b).
5. Whether the liability assumption should be treated as a promise to pay, rather than
as a legal obligation, such that the promise constitutes “other property” within the
meaning of I.R.C. § 358(a).
6. Whether preferred stock issued in connection with the 351 transaction is
nonqualified preferred stock within the meaning of I.R.C. § 351(g), or whether the
sale of stock should be recharacterized.
7. Whether the stock loss should be disallowed or recharacterized under applicable
judicial principles, including step transaction, economic sham, or sham in fact.
8. Whether the liability assumption has been properly valued.
9. Whether the transferor or the transferee is entitled to subsequent tax benefits
associated with the subsequent deduction of the contingent liabilities.
10. Whether the Service should assert the negligence or disregard of rules or
regulations and/or the substantial understatement of income tax portions of I.R.C. §
6662 against a taxpayer for engaging in a contingent liability transaction.
Any capital loss disallowance attributable to the contingent liability transaction should
not rely upon I.R.C. § 165, a section 351 business purpose argument, or the duplicated
loss rules. The application of section 269 should be examined (but do not assert it
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simply because a dormant