-394-
Considering all the circumstances, we conclude the notes
receivable were used as a device to circumvent section 357(c) and
resulted in nothing more than a circular transfer of funds
between and among Kanter-controlled entities. There is no
evidence in the record that the notes receivable represented
valid indebtedness.
In the absence of any discernible bases in the notes
receivable, we conclude the notes did not increase the aggregate
basis in the property Kanter’s grantor trusts transferred to
Cashmere. Under section 357(c), Kanter was required to recognize
as capital gain the excess of the liabilities Cashmere assumed
over basis in the property his grantor trusts transferred to
Cashmere.
3. Kanter’s Use of the Installment Method
Section 453(a) provides the general rule that income from an
installment sale shall be reported under the installment method.
An installment sale generally is defined as a disposition of
property where at least one payment is to be received after the
close of the taxable year in which the disposition occurs. Sec.
453(b)(1).
Section 453(e) prescribes special rules applicable to
installment sales by related persons. In particular, section
453(e)(1) provides that if a person sells property to a related
party (the first disposition) under the installment method, and
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