-269-
million receivable had a zero basis in SMP’s hands, SMP received
no carryover basis under section 722 in its Corona membership
interest on the contribution of that receivable to Corona.
Corona received no carryover basis under section 723 in the
contributed $79 million receivable. Consequently, SMP’s and
Corona’s basis reporting for the receivables was infinitely more
than 400 percent of the amount that we determined to be the
correct basis in the receivables.190 See sec. 1.6662-5(g), Income
Tax Regs. (“The value or adjusted basis claimed on a return of
any property with a correct value or adjusted basis of zero is
considered to be 400 percent or more of the correct amount.
There is a gross valuation misstatement with respect to such
property, therefore, and the applicable penalty rate is 40
percent.”); see also Rybak v. Commissioner, 91 T.C. 524, 566-567
(1988).
190 As an alternative holding, we have concluded that the
step transaction doctrine applies to recast Generale Bank’s and
CLIS’s contributions of the receivables and Somerville S Trust’s
purchases of Generale Bank’s and CLIS’s preferred interests in
SMP as direct sales of the SMHC receivables and stock from
Generale Bank and CLIS to Somerville S Trust followed by
Somerville S Trust’s contributions of those items for preferred
interests in SMP. Pursuant to this holding, Somerville S Trust
seemingly would receive a $10 million cost basis in the SMHC
receivables and stock which would carry over to SMP. The parties
have not addressed this issue, but presumably this $10 million
cost basis would be divided among the SMHC receivables and stock
on a proportional basis. The basis amounts that SMP reported on
its 1997 and 1998 partnership tax returns and Corona reported on
its 1997 partnership tax return would still exceed by far more
than 400 percent any $10 million cost basis in the receivables.
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