- 410 -
The checks written by Administration Co. (purportedly on
behalf of the Bea Ritch Trusts) in payment of the notes were not
reflected on Administrative Co’s. general ledger for the period
ending June 30, 1984. No evidence was presented to establish
that the Bea Ritch Trusts used their own funds to pay off the
notes.
In short, no evidence of any business purposes for any of
the notes was presented by Kanter or that the notes represented
valid debts. Rather, the notes and cash transferred constituted
a circular flow between and among Kanter-controlled entities with
the purpose being to avoid immediate taxable gains. Given the
complex series of transactions employed to achieve a simple sale
of partnership real estate interests for cash, we think that the
integral aspect of the plan was to avoid Federal income tax on
the exchange and the inclusion of promissory notes purportedly
held by the trusts and made part of the section 351 exchange
lacked a bona fide business purpose.
The policy behind section 351 is to encourage the formation
and/or capitalization of corporations by providing tax relief in
those instances where individuals would be hesitant to transfer
appreciated property because of the taxable gains that otherwise
would be realized and recognized. The tax-free exchange rules
are not intended to provide a loophole; i.e., the transfer of
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