-389-
legitimate business purposes; i.e., to enjoy tax advantages in
the event the partnership interests were sold and/or to “have an
aggregation of value” within the corporate entity to allow for
more efficient investments. Kanter, Transcr. at 4243. Kanter
further asserts the section 357(b) issue was not raised in the
pleadings and is not properly before the Court and, in any event,
the Cashmere transaction is not the type of arrangement that
section 357(b) is designed to address. Finally, Kanter contends
the promissory notes the grantor trusts transferred to Cashmere
constituted genuine indebtedness, rendering section 357(c)
inapplicable in these cases.
B. Analysis
Respondent determined in the notice of deficiency that the
transfers from Kanter’s grantor trusts to Cashmere for stock did
not qualify as a tax-free exchange because the transfers were not
intended to serve a bona fide business purpose but instead were
carried out only to avoid Federal income tax. Although the
notice of deficiency did not explicitly refer to section 351 or
357, we conclude Kanter understood respondent’s position
regarding the Cashmere transaction and the bases for respondent’s
adjustments. We further conclude, as discussed in detail below,
the Cashmere transaction does not qualify for nonrecognition
treatment under either section 357(b) or (c), and therefore we
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