Boot Distributions and Assumption of Liabilities (Portfolio 782)

Tax Management Portfolio, Boot Distributions and Assumption of Liabilities, No. 782-3rd, discusses the tax problems arising in connection with boot distributions by a corporation to shareholders and creditors.

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Tax Management Portfolio, Boot Distributions and Assumption of Liabilities, No. 782-3rd, discusses the tax problems arising in connection with boot distributions by a corporation to shareholders and creditors. Boot is money or property received pursuant to a corporate organization, reorganization or separation, other than the stock and securities permitted to be received under various Code sections without the recognition of gain or loss. When boot is received in these transactions, the gain (but not loss) generally is recognized to the extent of the value of the boot. In corporate reorganizations and separations, the gain may be treated as a dividend to the extent of available earnings and profits. Nonqualified preferred stock is generally treated as boot when received in a corporate organization, reorganization, or separation exchange. Securities received in a corporate organization are treated as boot. Securities received in a corporate reorganization or separation exchange are treated as boot to the extent that the fair market value of the principal amount of securities received exceeds the principal amount of the securities surrendered.
The assumption of liabilities (including the acquisition of property subject to a liability) by a transferee corporation in a corporate organization or reorganization generally is not treated as the receipt of boot by the transferor. Exceptions apply if the principal purpose of an assumption is to avoid federal income tax or is not for a bona fide business purpose, or to the extent that the assumed liabilities exceed the adjusted basis of the property transferred.
This Portfolio examines the statutory development of the rules pertaining to boot, as well as the effect of IRS rulings and court decisions. It also analyzes: (1) the nature of boot, (2) the types of boot other than money, (3) the extent to which the assumption of liabilities constitutes boot, (4) the tax impact of boot upon the distributing corporation and the recipient, including the treatment of boot as a dividend, (5) the effect of excessive boot, and (6) other problems relating to particular types of corporate transactions.


George C. Koutouras

George C. Koutouras, Esq., Lumi National; LL.M. (Taxation), Georgetown University Law Center; J.D., University of Detroit School of Law; B.S.A., University of Michigan; bar membership, Michigan and Illinois; formerly Attorney/Advisor to Special Trial Judge Stanley J. Goldberg, United States Tax Court; Co-Author, 767-2nd T.M., Redemptions and 564 T.M., Related Party Transactions; Adjunct Professor, University of Illinois Urbana-Champaign Master of Tax Program.

Mark Q. Tizabgar

Mark Q. Tizabgar, Esq., CPA, PricewaterhouseCoopers LLP; LL.M. (Taxation), New York University School of Law; J.D. (cum laude), Southwestern University School of Law; B.S., California State University Northridge; State Bar of California; Co-Author, 564 T.M., Related Party Transactions; Adjunct Professor, Golden Gate University, Master of Tax Program.

Table of Contents

Detailed Analysis

I. Introduction

A. Outline of Statutory Provisions

1. General Statement

2. Boot Received at the Shareholder Level

3. Boot Received by a Corporate Transferor in a Reorganization

4. Recognition of Gain to a Corporate Distributor of Boot

B. Consequences of the Receipt of Boot

C. Historical Background

1. Early Statutory History

2. The Bedford Case - Automatic Dividends

3. The Bazley Case - Unrelated Dividends

D. History of § 357

1. The Hendler Case

2. The Hendler Legislation

3. Liabilities in Excess of Basis

II. Boot in a Section 351 Exchange

A. Nonqualified Preferred Stock

B. Exclusion of Securities in § 351 Exchanges

C. Securities v. "Other Property"

D. Installment Reporting of Boot

E. Boot in a § 351 Exchange v. Separate Sale

F. Purchase Obligations Classified as Securities in Section 351 Exchanges

G. Purchase Obligations Classified as Equity Stock in a § 351 Exchange

H. Basis of Stock and Assets in a § 351 Exchange

1. Basis to Transferor Shareholder

2. Reduction of Basis by Amount of Liability Assumed

3. Basis to the Acquiring Corporation - General Rule

a. Limitation on Built-In Losses - Section 362(e)

b. Loss Importation - Section 362(e)(1)

c. Loss Duplication - Section 362(e)(2)

d. Election to Reduce Stock Basis Under § 362(e)(2)(C)

I. Allocating Boot in § 351 Exchanges

1. Allocation of Boot in Proportion to Value of Assets Transferred - Gain to Transferor

2. Effect of Liabilities Encumbering Specific Assets

3. Effect of Boot on Basis of Assets to Acquiring Corporation

4. Allocation of Gain Recognized under § 357(c)

J. Recognition of Gain on Distribution of Boot

III. Assumption of Liabilities

A. Section 357(a) - Assumed Liability Generally Is Not Boot

1. General Rule

2. Relationship Between § § 357(a) and 368(a)(1)(C)

3. Transactions Covered by § 357(a)

4. What Constitutes the Assumption of a Liability?

5. 1999 Legislation

6. Assumption of Stock Warrants

7. Assumption and Immediate Payment or Extinguishment of a Liability

8. Assumption of Bonds in a Reorganization

9. Assumed Liability Need Not Be Secured

10. Payment by Transferee of an Unassumed Liability

11. Liabilities Fixed and Determined in a Reorganization

12. Assumption of Contingent Debt of Transferor to Transferee

13. Contingent Liabilities Owed to Third Parties

14. Assignment of Income and Deduction of Liabilities Assumed in a § 351 Exchange

15. Deduction of Liabilities Assumed in Reorganizations

B. Section 357(b) - Tax Avoidance or Lack of Business Purpose

1. Summary of Statute

2. Gain Must Be Realized

3. Determination of Amount of Liability Assumed and Gain Realized

4. Judicial Interpretation of Tax Avoidance and Bona Fide Business Purposes

a. 1939 Code Cases

b. 1954 Code Cases

5. Taint of Total Liabilities

6. Tax Avoidance v. Lack of Business Purpose

C. Section 357(c) - Liabilities in Excess of Basis

1. Summary of Statute

a. Pre October 22, 2004

b. Post October 22, 2004 (Effective Date of American Jobs Creation Act of 2004)

c. Exceptions

2. Background

3. Gain Need Not Be Realized

4. Retention of Personal Liability or Issuance of Transferor's Personal Note

5. Aggregation of Liabilities and Basis

6. Excess Liabilities Determined Separately for Each Transferor

7. Exclusion of Deductible Liabilities in a § 351 Exchange

8. Allocation of § 357(c) Gain to Assets

9. Application of § 357(c) in Reorganizations: General

a. Pre October 22, 2004 (Effective Date of American Jobs Creation Act of 2004)

b. Post October 22, 2004 (Effective Date of American Jobs Creation Act of 2004)

10. IRS Rulings Applying § 357(c) to Reorganizations

a. Pre October 22, 2004 (Effective Date of American Jobs Creation Act of 2004)

b. Post October 22, 2004 (Effective Date of American Jobs Creation Act of 2004)

11. Insolvent Transferor

12. Use of Disregarded Entities and § 357(c)

D. Assumption of a Liability in an Acquisition Described in Both § § 351 and 304

IV. Boot in Reorganizations

Introductory Material

A. Summary of Nonqualifying Consideration in Corporate Organizations and Reorganizations

B. Nonqualified Preferred Stock

C. Characterization of Boot as Having the Effect of a Dividend

1. Section 356(a)(2)

2. Distributions to Bondholders

3. Attribution Rules

4. Boot Distributions to Shareholders

a. Major Issues

b. Cases and Rulings Before the Clark Case

c. The Clark Case

5. Multiple Shareholders

6. Which Corporation's Earnings and Profits?

7. Accumulated v. Current Earnings and Profits

8. Effect of Distribution of Boot on Earnings and Profits

9. Dividends-Received Deduction for Boot Dividend

10. Section 1059

11. Affiliated Groups

12. Boot Received for Non-Section 306 Preferred Stock

D. Miscellaneous Issues

1. Cash for Fractional Shares

2. Cash Payments to Dissenting Shareholders

3. Excess Principal Amount of Securities in Corporate Reorganizations and Separations Treated as Boot

4. Determination of the Principal Amount of Securities

5. Pass-Through of Boot Received by Transferor Corporation

6. Allocation of Proceeds by Shareholders in a Reorganization

a. Allocation of Stock Consideration Received

(1) Exchanging One Share or Security for Fractional, Whole, or Multiple Shares of Same Stock or Security

(2) One Share or Security Surrendered in Exchange for More Than One Class of Stock or Security

(3) More Than One Class of Stock or Security Is Surrendered in Exchange for One Share of Stock or Security

(4) More Than One Share of Stock or Security Is Surrendered in Exchange for More Than One Class of Stock or Securities

b. Allocation of Boot Received

7. Delayed Boot Distributions

8. Installment Reporting of Boot Received in a Reorganization

9. Boot Allocated to § 306 Stock

E. Boot in "B" Reorganizations

F. Boot in "C" Reorganizations

1. Solely for Voting Stock Requirement

2. Assumption of Liabilities in a "C" Reorganization

3. Only the Acquiring Corporation May Assume Liabilities in a Triangular "C" Reorganization

4. The 20% Boot Relaxation Rule

5. Target Corporation's Payment of Debt with Stock of Acquiring Corporation

G. Boot in "A" Reorganizations

1. Scope of an "A" Reorganization

a. Disposition of Stock After a Reorganization

b. Measuring Continuity of Interest

(1) Signing Date Rule and Binding Contracts

(2) Fixed and Contingent Consideration

2. Potential Disqualification Caused by Excessive Boot

3. Use of Step-Transaction Doctrine to Create Boot

4. Assumption of Liabilities

H. Boot in "E" Reorganizations

I. Liquidation - Reincorporations

1. Goal of Liquidation-Reincorporation Transactions

2. Classification as a "D" Reorganization Before 1984

3. Classification as an "E" or "F" Reorganization

4. Separate Distribution Theory

J. Hybrid Consideration in Reorganizations

1. Stock Received in § 351 Exchanges and Reorganizations

2. Stock Received in Corporate Separations

3. Contingent and Escrowed Stock

4. Warrants, Options, Puts, Rescission Rights and Poison Pills as Boot

a. Warrants to Purchase Distributing Corporation's Stock

b. Warrants or Options to Purchase Property Other than the Distributing Corporation's Stock

c. Option to Put Stock to the Issuer

d. Rescission Rights

e. Poison Pills

V. Corporate Separations

A. In General

B. Treatment of Shareholders

C. Recognition of Gain to the Distributing Corporation on a Disqualified Distribution

D. Recognition of Gain to Distributing Corporation on a Distribution of Boot

1. General Rule

2. Non-Reorganization Distributions of Boot

3. Reorganization Distributions of Boot

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Reorganization: Illustration of Securities Received as Boot by Shareholders and Security Holders

Worksheet 2 Corporate Separation: Illustration of Stock Received as Boot by Shareholders

Worksheet 3 Internal Revenue Bill of 1924, Senate Report No. 398, 68th Cong., 1st Sess. (1924) [To Accompany H.R. 6715] 1939-1 C.B. (Part 2) 277

Worksheet 4 Revenue Act of 1939; H. Rep. No. 855, 76th Cong., 1st Sess. (1939) 1939-2 C.B. 507, 518â€"520; S. Rep. No. 648, 76th Cong., 1st Sess. (1939) 1939-2 C.B. 525

Worksheet 5 Internal Revenue Code of 1954 H. Rep. No. 1337, 83d Cong., 2d Sess. (1954) A129 S. Rep. No. 1622, 83d Cong., 2d Sess. (1954) 270

Worksheet 6 Internal Revenue Code of 1954, Section 357(c) S. Rep. No. 1263, 95th Cong., 2d Sess. (1978) 183â€"186

Worksheet 7 Internal Revenue Code of 1954; Section 357(c) S. Rep. No. 498, 96th Cong., 2d Sess. (1980), 62â€"63

Worksheet 8 Excerpts from Committee Reports to the American Jobs Creation Act of 2004 - Amendments to Sections 357 and 362

Worksheet 9 Preamble to Proposed Regulations on Transactions Involving the Transfer of No Net Value, REG-163314-03, 2005-14 I.R.B. 835

Worksheet 10 Preamble to Final Regulations on "E" and "F" Reorganizations, T.D. 9182, 2005-11 I.R.B. 713

Worksheet 11 Preamble to Regulations on Continuity of Interest, T.D. 9316, 72 Fed. Reg. 12974 (3/20/07)

Worksheet 12 Preamble to Final Regulations on Statutory Mergers and Consolidations, T.D. 9242, 2006-7 I.R.B. 422

Worksheet 13 Preamble to Final Basis Allocation Regulations, T.D. 9244, 2006-8 I.R.B. 463

Worksheet 14 Agreement to Assume Liabilities and Indemnity Agreement




Revenue Acts:

Miscellaneous Statutes:


Legislative History:

Congressional Committee Reports:

Staff of the Joint Committee on Taxation:

Treasury Rulings:




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