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Does liability assumption reduce the amount of gain recognized under Section 356(a)(1) in the same manner as it does under Section 301?

Section 356 (a)(1) Section 301 Liability Assumption
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Chris Haunschild
It does not appear that liability assumption reduces the amount of gain recognized under Section 356(a)(1). In fact, the lack of symmetry between the language of certain key provisions in the Code raises a concern that a taxpayer might not be able to reduce its Section 356(a)(1) gain amount by the amount of debt assumed.

Section 356(a)(1) states in the flush language:

then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

Section 301(b)(1) contains similar language:

For purposes of this section, the amount of any distribution shall be the amount of money received, plus the fair market value of the other property received.

It is interesting that Section 301(b)(2) goes on to state:

The amount of any distribution determined under paragraph (1) shall be reduced (but not below zero) by—
(A) the amount of any liability of the corporation assumed by the shareholder in connection with the distribution, and

(B) the amount of any liability to which the property received by the shareholder is subject immediately before, and immediately after, the distribution.

Neither Section 356(a)(1), nor any operative rules linked to Section 356(a)(1), provide that debt assumption is to be taken into account in computing the amount of taxable capital gain under Section 356(a)(1). Because Section 301(b)(2) contains a specific rule for dividends (which does not apply for 356(a)(1) purposes, but would apply for 356(a)(2) purposes) the inclusion of the specific rule could lead to the inference that debt assumption should not be netted to determine the taxable amount of gain under §356(a)(1).

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