## Facts

- Jack L. Easson owned and operated an apartment house in Portland, Oregon.
- On June 19, 1952, Easson encumbered the property with a $250,000 mortgage and signed the underlying notes, remaining personally liable.
- In October 1952, Easson formed Envoy Apartments (an Oregon corporation) and transferred the apartment property to the corporation, subject to the mortgage, in exchange for all of Envoy’s stock.
- At the time of transfer, Easson’s basis in the property was $87,214.86; the property’s fair market value was $320,000; and the mortgage principal balance was $247,064.01.
- The Eassons reported no gain on their 1952 returns, treating the exchange as nonrecognition under § 112(b)(5) of the 1939 Code (later § 351).
- The Commissioner determined that Easson realized taxable gain, taxable at ordinary income rates.
- The Tax Court held the exchange qualified under § 112(b)(5) and was not principally tax-motivated, but required recognition of $159,849.15 (liabilities minus basis) to avoid a negative stock basis; it set stock basis at zero and allocated recognized gain between ordinary income (depreciable property) and capital gain (land).
- Both parties appealed.

## Issues

1. Whether the transfer of mortgaged property to a controlled corporation solely for its stock qualified for nonrecognition under § 112(b)(5) despite the mortgage and Easson’s continued personal liability.
2. Whether the corporation’s taking the property subject to the mortgage constituted “other property or money” requiring gain recognition under §§ 112(c) and 112(k), and if so, to what extent.
3. Whether gain may be recognized merely because liabilities exceeded basis (to prevent a negative stock basis), and how stock basis must be computed under §§ 112 and 113.

## Decision

- The Ninth Circuit agreed the transaction fell within § 112(b)(5)’s general nonrecognition framework.
- The court rejected the Tax Court’s rule that gain must be recognized solely because liabilities exceeded basis and a negative stock basis would otherwise result.
- The court held that recognition must be grounded in the specific statutory provisions governing boot and liabilities, not an extra-statutory “negative basis” rationale.
- The court set aside the Tax Court’s $159,849.15 recognition computation to the extent it rested on preventing negative basis, and required recomputation under the governing statutory scheme.

## Legal Principles

- In a qualifying § 112(b)(5) (later § 351) property-for-stock transfer, gain is not recognized except as the Code expressly requires.
- Assumption of liabilities or transfer of property subject to liabilities triggers recognition only under the statutory boot and liability rules (notably §§ 112(c) and 112(k) of the 1939 Code).
- Liabilities exceeding the transferor’s basis do not, by themselves, authorize recognition of additional gain beyond what the statutes specify.
- Stock basis in a nonrecognition exchange must be computed under the Code’s basis provisions (including § 113(a)), adjusted only by statutorily recognized gain or loss; courts may not create taxable gain solely to avoid a negative basis result.

## Conclusion

The Ninth Circuit held that, although Easson’s incorporation transfer generally qualified for nonrecognition, the Tax Court could not impose taxable gain merely because the mortgage exceeded Easson’s basis; gain and stock basis had to be determined strictly under the Code’s boot, liability, and basis provisions.


Easson v. Comm’r of Internal Revenue, 294 F.2d 653 (9th Cir. 1961)