Lessinger v. Commissioner
872 F. 2d 619 (C.A.-2, 1989)
Reversed: 85 T.C. 824 (1985)
Yanina McMann
Tax 8030
Background
• Sal Lessinger; sole proprietor of “Universal
Screw and Bolt Co.”
• Incorporated under New York law by his
attorney
• Entity had negative net worth at the
transfer (liabilities > assets)
– “Loan receiveable- SL” entry on books for
$255,499
Q1 & Analysis 1
• Q1: When assets are transferred but no
new stock is issued, does the transfer still
qualify as Sec. 351?
• Yes. If it’s a sole shareholder and the
transfer is into a wholly-owned operation.
Q2 and Analysis 2
• Was the created debt real and countable
toward the non-recognition when there is
negative net worth (Sec 357(c))?
• Commissioner: no due date, interest rate
• Taxpayer: later signed a prom. note;
Midland Marine used is as collateral;
– Yes, the debt is real
Q3 and Analysis 3
• What is the adjusted basis of the
transferred property to the corporation?
• No gain recognized under Sec. 351 unless
falls under Sec. 357(c)
• Normally, basis = asset
• In this case: basis to corp. is face amount
in hands of taxpayer