- 10 -
$8,850), we sustain respondent's determination that petitioners
realized a $430,724 capital gain ($512,000 - $81,276) on this
transfer. Petitioners do not challenge respondent's application
of section 1202 to this gain. We sustain respondent's
determination that $348,283 of this capital gain is taxable to
petitioners, and that petitioners underreported $331,593 of this
gain ($348,283 - $16,690).
The amount of consideration that exceeded the properties'
fair market value also is income to petitioners. To the extent
that a corporation cancels its shareholder's debt without
consideration, the cancellation may be treated as a distribution
to the shareholder, which, in turn, may be treated as a dividend
to the shareholder to the extent of the corporation's earnings
and profits (E+P). Secs. 61(a)(12), 301(a), (c)(1); United
States v. Kirby Lumber Co., 284 U.S. 1 (1931); Shephard v.
Commissioner, 340 F.2d 27 (6th Cir. 1965), affg. per curiam T.C.
Memo. 1963-294; Haber v. Commissioner, 52 T.C. 255, 262 (1969),
affd. 422 F.2d 198 (5th Cir. 1970); sec. 1.301-1(m), Income Tax
Regs. The same is true when a corporation assumes its
shareholder's debt, without receiving adequate consideration.
See Old Colony Trust Co. v. Commissioner, 279 U.S. 716 (1929);
Tennessee Sec., Inc. v. Commissioner, 674 F.2d 570 (6th Cir.
1982), affg. T.C. Memo. 1978-434; Enoch v. Commissioner, 57 T.C.
781 (1972); American Properties, Inc. v. Commissioner, 28 T.C.
1100 (1957), affd. per curiam 262 F.2d 150 (9th Cir. 1958).
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