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contingently liable only to the secured creditors of Seggerman
Farms, namely Minonk State Bank.
Although the Court of Appeals for the Seventh Circuit, to
which these cases are appealable, has not decided a case squarely
on point, that court refused to give a restrictive interpretation
to the statute and denied relief to a taxpayer with a section
357(c) gain in Testor v. Commissioner, 327 F.2d 788 (7th Cir.
1964), affg. 40 T.C. 273 (1963). In Testor, a taxpayer
transferred the assets and the liabilities of his sole
proprietorship to a corporation. The liabilities were assumed by
the corporation and were in excess of the aggregate book value of
the assets that were transferred. None of the assets were
specifically encumbered by the liabilities, and for that reason
the taxpayer argued that section 357(c) did not apply. In
interpreting section 357(c), the Court of Appeals affirmed the
decision of the Tax Court and held that “both the language and
legislative history indicate that section 357(c) is meant to
apply wherever liabilities are assumed or property is transferred
subject to liability.” Id. at 790. The taxpayer was liable for
tax on the gain under section 357(c).
Petitioners contend that their secured creditors insisted
that they incorporate in order to restructure their business debt
and procure additional credit for the upcoming crop season.
Petitioners maintain that they realized no personal net gain and
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