Contributions, Distributions, and Assumption of Liabilities: Confronting Economic Reality

To combat a relatively arcane international tax-shelter abuse, Congress recently amended Code sections 357 and 362 governing contributions of encumbered property to a corporation. This Article offers a critical assessment of the recent amendments to the liability assumption rules of section 357 and corresponding basis provisions of section 362. Part I explores the divergence between the former liability assumption rules and the economic benefit doctrine of the section 1001 regulations. Part II focuses on the technical definition of assumption of recourse and nonrecourse liabilities under amended section 357(d). Part III examines the corollary basis provisions of section 362, as modified to reflect the section 357(d) liability assumption rules. Part IV argues that by logical extension the amended liability assumption rules could also apply to corporate distributions of encumbered property, an area overlooked by Congress. The conclusion suggests that Congress should exercise caution in extending section 357(d) principles and reconsider the approach of ad hoc anti-abuse measures