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
Harl, Neil E.
"Indebtedness in Excess of Basis: A Problem Even for Gifts,"
Agricultural Law Digest: Vol. 24
, Article 1.
Available at: https://lib.dr.iastate.edu/aglawdigest/vol24/iss12/1