## Facts

- Donald J. Peracchi transferred two parcels of encumbered real estate to his wholly owned corporation, NAC, intending nonrecognition treatment under I.R.C. § 351.
- The liabilities secured by the real estate exceeded Peracchi’s aggregate basis in the properties by more than $500,000.
- Under I.R.C. § 357(c), liabilities assumed in a § 351 transfer that exceed the transferor’s aggregate basis generally trigger immediate gain recognition equal to the excess.
- To avoid § 357(c) gain, Peracchi also transferred to NAC his own ten-year promissory note with a principal amount of $1,060,000 and interest at 11%.
- The parties stipulated that Peracchi was creditworthy and the note carried a market rate of interest.
- The IRS asserted the note was either not genuine indebtedness (an unenforceable gift) or, even if genuine, had a basis of zero and thus could not increase aggregate basis to avoid § 357(c) gain.
- The Tax Court ruled for the Commissioner; Peracchi appealed.

## Issues

1. Whether a taxpayer’s self-issued promissory note contributed to his wholly owned corporation constitutes genuine indebtedness for federal tax purposes.
2. If the note is genuine, whether its basis to the contributor equals its face amount so it increases aggregate basis for purposes of I.R.C. § 357(c).

## Decision

- The Ninth Circuit reversed the Tax Court.
- The court held the promissory note was bona fide indebtedness, not a sham or unenforceable gift.
- The court held the note’s basis equaled its face amount, increasing Peracchi’s aggregate basis in the § 351 transfer and preventing gain recognition under I.R.C. § 357(c).

## Legal Principles

- A shareholder’s self-issued note transferred to a corporation may be respected as genuine debt when it creates enforceable obligations and real economic exposure for the shareholder.
- For purposes of I.R.C. § 357(c), aggregate basis in property transferred can include the face amount of a bona fide self-issued note contributed in the same transaction.
- The analysis emphasizes economic consequences: a note that corporate creditors can reach in insolvency and that is commercially realistic (e.g., market interest; creditworthy maker) supports treating the note as substantive and basis-bearing.
- I.R.C. § 357(c) is aimed at preventing avoidance through liability-in-excess-of-basis transfers, not at imposing gain where a taxpayer makes a genuine additional capital contribution that increases the taxpayer’s economic stake.

## Conclusion

The Ninth Circuit concluded that Peracchi’s commercially realistic, enforceable promissory note subjected him to real financial risk and therefore counted as property with face-value basis in the § 351 transfer, eliminating otherwise taxable gain under I.R.C. § 357(c).


Peracchi v. Comm’r, 143 F.3d 487 (9th Cir. 1998)