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taxpayer’s principal purpose was to avoid Federal income tax on
the exchange or was not a bona fide business purpose.
Section 357(c)(1)(A) provides, in the case of an exchange to
which section 351 applies, that if the amount of the liabilities
assumed exceeds the total of the adjusted basis of the property
transferred pursuant to the exchange, the excess is treated as
gain from the sale of a capital or noncapital asset, as the case
may be.152
1. Applicability of Section 357(b)(1)
Considering all the facts and circumstances, we conclude
Kanter arranged the Cashmere transaction principally for the
purpose of avoiding Federal income tax. The convoluted series of
Cashmere transactions began when Zell informed Kanter of Equity’s
desire to acquire the partnership interests held by Kanter’s
grantor trusts. In the end, Equity acquired those partnership
interests in exchange for cash. In between, over a period of a
few months, Kanter arranged: (1) Transfers of notes receivable
to his grantor trusts in an aggregate amount approximately equal
to the grantor trusts’ negative capital accounts in their
partnership interests, (2) transfers of the grantor trusts’
partnership interests and the notes receivable to Cashmere in
exchange for Cashmere stock, (3) sales by the grantor trusts of
their Cashmere stock to Waco for promissory notes, (4) the
152 Sec. 357(c)(2)(A) provides sec. 357(c)(1) shall not
apply to any exchange to which sec. 357(b)(1) applies.
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