Volume 5 Winter 2011 Number 2 - Charleston Law Review

2011] Tax Aspects—Financially Troubled Entitiesunder § 357(c). On the other hand, if appreciated assets are alsocontributed, then the § 357(c) issue is resolved at the partnerlevel, and there may be only a small problem or no problem at allwith respect to the issue of liabilities in excess of basis.If the transaction is structured as a transfer of partnershipinterests by the partners to a corporation in exchange for stock,the transaction will be subject to § 351 and there will be no gainrecognized by the partners, provided there is no boot. 185 On theother hand, if liabilities exceed tax basis of assets, there shouldbe boot by reason of the fact that the liabilities of the partnershipshould be attributed to the partners and subjected to gain under§ 357(c). 186In addition to the § 357(c) problem, one must also considerthe application of § 269. 187 Section 269(a) provides that if ataxpayer acquires control of a corporation, “and the principalpurpose of the acquisition was the evasion or avoidance of federalincome tax by securing the benefit of a deduction, credit, or otherallowance that such person of corporation would not otherwiseenjoy, then the Secretary [of the Service] may disallow suchdeduction, credit or other allowance.” 188 There is an extendedbody of case law concerning this section, and in many cases thetaxpayer has prevailed. 189 Without reviewing such section andthe cases pertaining thereto, there is a far greater problem. Thisproblem relates to the codification of the economic substancedoctrine in new § 7701(o), which came into effect on March 20,2010. 190The new statute requires a transaction to satisfy bothobjective and subjective elements in order to pass the economicsubstance doctrine. 191 The economic substance doctrine was185. I.R.C. § 357(c)(1)(A).186. Rev. Rul. 80-323, 1980-2 C.B. 124.187. See I.R.C. § 269.188. I.R.C. § 269(a).189. See, e.g., Supreme Inv. Corp. v. United States, 468 F.2d 270 (5th Cir.1972); see also World Serv. Life Ins. Co. v. United States, 471 F.2d 247 (8th Cir.1973).190. The Health Care and Education Reconciliation Act of 2010 added I.R.C.§ 7701(o).191. I.R.C. § 7701(o).263