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Abstract

It is widely understood that indebtedness in excess of income tax basis is a problem in sales or exchanges of property.1 For example, taxable gain is recognized to the extent the sum of liabilities assumed or taken subject to by a corporation exceeds the aggregate basis of assets transferred in a tax-free exchange on formation of the corporation.2 That result can arise in connection with an installment sale,3 or about any other “sale or exchange” in addition to an otherwise tax-free exchange to a corporation, as noted.4 Transfers involving partnerships are subject to a somewhat different set of rules.5 What is less widely known is that the same result can occur with a gift.6

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