Donald J. and Judith E. Peracchi - Page 8

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                              (B)  to which section 361                               
                         applies by reason of a plan of                               
                         reorganization within the meaning                            
                         of section 368(a)(1)(D),                                     
               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.                                                                    

               Thus, for present purposes, section 357(a) provides the                
          general rule that, in a section 351 nonrecognition exchange, the            
          effect of section 351 is not nullified even though as part of the           
          consideration the transferee assumes a liability of the                     
          transferor, or acquires property in the exchange which is subject           
          to a liability.  Then, section 357(c)(1) provides an exception to           
          the general rule; namely, that if the sum of the liabilities                
          assumed plus the amount of the liabilities to which the                     
          transferred property is subject exceeds the adjusted basis of the           
          property, then the excess is treated as a gain from the sale or             
          exchange of property.                                                       
               Respondent argues that, by virtue of section 357(c)(1),                
          petitioners must recognize gain resulting from the transfer to              
          their wholly owned corporation of property subject to liabilities           
          in excess of petitioners' basis in the property.                            







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