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exception for transfers to controlled corporations is to
encourage the capitalization of businesses by granting beneficial
tax treatment to the transfer of appreciated property to
corporations controlled by the transferor.
Section 357(a) provides generally that if the taxpayer
receives property which would be permitted under section 351
without the recognition of gain, and another party, as part of
the consideration, assumes a liability of the taxpayer or
acquires from the taxpayer property subject to a liability, then
such assumption shall not be treated as money or other property
and the exchange of property is valid under section 351.
However, section 357(b)(1) provides generally that if,
considering the nature of the liability and the circumstances in
which the arrangement for assumption or acquisition of the
liability was made, it appears that the principal purpose of the
taxpayer with respect to the assumption was to avoid Federal
income tax on the exchange or was not for a bona fide business
purpose, then such assumption shall, for purposes of section 351,
be considered as money received by the taxpayer on the exchange.
The clear objective desired by the real parties in interest
(Kanter, Zell, and Lurie) was to sell the real estate partnership
interests held by the trusts for cash. Hence, viewing the
transactions as a whole, and in the context of the parties'
motivations, it is clear that there was no business purpose for
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