                          T.C. Memo. 2001-99



                        UNITED STATES TAX COURT



         SEGGERMAN FARMS, INCORPORATED, ET AL.,1 Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 16269-99, 16271-99,           Filed April 25, 2001.
                 16272-99, 16273-99.



     David E. Alms, for petitioners.

     David S. Weiner, for respondent.



                          MEMORANDUM OPINION

     COHEN, Judge:     Respondent determined the following

deficiencies in petitioners’ Federal income tax:




     1
       Cases of the following petitioners are consolidated
herewith: Craig and Linda Seggerman, docket No. 16271-99;
Michael Seggerman, docket No. 16272-99; and Ronald and Sally
Seggerman, docket No. 16273-99.
                               - 2 -

       Docket No.             1993        1994         1995

        16269-99             $1,059      $3,176      $19,431
        16271-99             24,436       5,663         -0-
        16272-99             24,058       2,654         -0-
        16273-99            104,847       4,867         -0-

     After concessions by the parties, the remaining issue for

decision is whether petitioners must recognize a gain on the

transfer of assets to Seggerman Farms, Incorporated, under

section 357 to the extent that the amount of liabilities that

were assumed plus the amount of liabilities to which the property

was subject exceeds the total of the adjusted basis of the

property that was transferred to the corporation.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

                            Background

     These cases were submitted fully stipulated under Rule 122.

The stipulated facts are incorporated as our findings by this

reference.

     Petitioners Ronald and Sally Seggerman, Craig and Linda

Seggerman, and Michael Seggerman, hereinafter collectively

referred to as petitioners, resided in Illinois at the time they

filed their petitions.   Petitioner Seggerman Farms, Incorporated

(Seggerman Farms), was an Illinois corporation, and its principal
                               - 3 -

place of business was Minonk, Illinois, at the time the petition

was filed.

     Before January 1, 1993, Ronald Seggerman and his sons, Craig

Seggerman and Michael Seggerman, operated a grain and cattle farm

as a joint venture and reported their respective shares of income

and expenses from the farm operations on Schedule F, Profit or

Loss From Farming.

     On March 19, 1993, Ronald Seggerman incorporated Seggerman

Farms.   The stock of Seggerman Farms was distributed as follows:

100 preferred shares and 38 common shares to Ronald Seggerman,

4 common shares to Sally Seggerman, 30 common shares to Craig

Seggerman, 3 common shares to Linda Seggerman, and 25 common

shares to Michael Seggerman.

     In early 1993, Ronald Seggerman, Craig Seggerman, and

Michael Seggerman transferred property to Seggerman Farms.

Ronald Seggerman transferred the following assets to Seggerman

Farms:
                              - 4 -

  Asset Description        Adjusted Basis      Fair Market Value

Depreciable property          $53,601               $143,760
Inventory                        -0-                 120,980
Fertilizer & lime                -0-                   1,360
Hay, straw, & oats               -0-                   7,340
Market livestock                 -0-                   7,500
Cattle feed                      -0-                     900
Gas & diesel                     -0-                   1,400
Miscellaneous tools              -0-                   3,000
Land, building, & grain        10,000                140,180
Cash                            2,600                  2,600
Improvements to Craig
  Seggerman’s house              -0-                  1,400
Accounts receivable              -0-                  1,440
Deficiency payments              -0-                 13,960
  Total                        66,201               445,820

Either the property that was transferred was subject to

liabilities or Seggerman Farms assumed the liabilities from

Ronald Seggerman in the amount of $402,903 as follows:

                                        Amount of
                Creditor                Liability

          Minonk State Bank             $259,370
          Ford Motor Co.                  11,533
          Federal Land Bank              132,000
            Total                        402,903

The amount of the liabilities that were transferred to Seggerman

Farms by Ronald Seggerman exceeded the adjusted basis of the

assets that he transferred to Seggerman Farms by $336,702.     The

portion of this gain that was attributable to long-term capital

gain was $206,751, and the portion attributable to ordinary gain

was $129,951.

     Craig Seggerman transferred the following assets to

Seggerman Farms:
                               - 5 -

  Asset Description          Adjusted Basis      Fair Market Value

Depreciable property            $27,457               $71,880
Inventory                          -0-                 60,490
Fertilizer & lime                  -0-                    680
Hay, straw, & oats                 -0-                  3,670
Market livestock                   -0-                  3,750
Cattle feed                        -0-                    450
Gas & diesel                       -0-                    700
Miscellaneous tools                -0-                  1,500
Cash                              3,060                 3,060
Improvements to Craig
  Seggerman’s house                -0-                    700
Accounts receivable                -0-                    720
Deficiency payments                -0-                  6,980
Deposits                           -0-                  1,760
  Total                          30,517               156,340

Either the property that was transferred was subject to

liabilities or Seggerman Farms assumed the liabilities from Craig

Seggerman in the amount of $121,911 as follows:

                                          Amount of
             Creditor                     Liability

          Minonk State Bank                $98,355
          Ford Motor Co.                     5,766
          Ray Seggerman                     17,790
            Total                          121,911

The amount of the liabilities that were transferred to Seggerman

Farms by Craig Seggerman exceeded the adjusted basis of the

assets that he transferred to Seggerman Farms by $91,394.       The

portion of this gain that was attributable to long-term capital

gain was $47,227, and the portion that was attributable to

ordinary gain was $44,167.

     Michael Seggerman transferred the following assets to

Seggerman Farms:
                              - 6 -

  Asset Description        Adjusted Basis       Fair Market Value

Depreciable property          $27,457                $71,880
Inventory                        -0-                  60,490
Fertilizer & lime                -0-                     680
Hay, straw, & oats               -0-                   3,670
Market livestock                 -0-                   3,750
Cattle feed                      -0-                     450
Gas & diesel                     -0-                     700
Miscellaneous tools              -0-                   1,500
Cash                            3,060                  3,060
Improvements to Craig
  Seggerman’s house              -0-                     700
Accounts receivable              -0-                     720
Deficiency payments              -0-                   6,980
Deposits                         -0-                   1,760
  Total                         30,517               156,340

Either the property that was transferred was subject to

liabilities or Seggerman Farms assumed the liabilities from

Michael Seggerman in the amount of $113,111 as follows:

                                         Amount of
               Creditor                  Liability

          Minonk State Bank               $89,555
          Ford Motor Co.                    5,766
          Ray Seggerman                    17,790
            Total                         113,111

The amount of the liabilities that were transferred to Seggerman

Farms by Michael Seggerman exceeded the adjusted basis of the

assets that he transferred to Seggerman Farms by $82,594.      The

portion of this gain that was attributable to long-term capital

gain was $42,827, and the portion attributable to ordinary gain

was $39,767.
                                - 7 -

     After the section 351 transaction, Seggerman Farms

refinanced a portion of the transferred debt.    Seggerman Farms

incurred the following debts:

                                                 Amount of
        Creditor                Loan No.         Liability

     Minonk State Bank           90780            $200,030
     Minonk State Bank           01260             130,000

In addition, Seggerman Farms, Ronald and Sally Seggerman, Craig

and Linda Seggerman, and Michael Seggerman borrowed the following

as comakers:

                                                 Amount of
        Creditor                Loan No.         Liability

     Minonk State Bank           90777            $162,000
     Minonk State Bank           90779             245,000

     Petitioners remained personally liable on all of the debt

that was assumed by Seggerman Farms, or to which the property

that was received by Seggerman Farms was subject, both before and

after the section 351 transfer of property to Seggerman Farms.

Ronald Seggerman executed a commercial guaranty of Seggerman

Farms’ debt to Minonk State Bank.    Sally Seggerman, Craig

Seggerman, Linda Seggerman, and Michael Seggerman executed

unlimited, continuing personal guaranties of Seggerman Farms’

debt to Minonk State Bank.   None of the loan proceeds were

disbursed directly to petitioners.
                                - 8 -

                              Discussion

     The sole issue for decision is whether petitioners must

recognize a gain on the transfer of assets to Seggerman Farms

under section 357 to the extent that the amount of liabilities

that were assumed plus the amount of liabilities to which the

property was subject exceeds the total of the adjusted basis of

the property that was transferred to the corporation.

     Petitioners argue that, because they were not relieved

personally from any debt that the corporation assumed or to which

transferred property was subject or that was refinanced pursuant

to restructuring of corporate debt, they should not have to

recognize gain on the amount of the liabilities that exceeds the

adjusted basis of the transferred assets.

     Section 357(c) provides, in part:

     SEC. 357(c).   Liabilities in Excess of Basis.--

          (1) In general.--In the case of an exchange--

               (A) to which section 351 applies * * *

               *     *    *     *       *   *   *

     if the sum of the amount of the liabilities assumed,
     plus the amount of the liabilities to which the
     property is subject, exceeds the total of the adjusted
     basis of the property transferred pursuant to such
     exchange, then such excess shall be considered as a
     gain from the sale or exchange of a capital asset or of
     property which is not a capital asset, as the case may
     be.

     In Rosen v. Commissioner, 62 T.C. 11 (1974), affd. without

published opinion 515 F.2d 507 (3d Cir. 1975), we addressed the
                               - 9 -

same issue in similar circumstances.     The taxpayer transferred

all of the assets and liabilities of a sole proprietorship to a

corporation in which he owned 100 percent of the outstanding

stock.   The liabilities exceeded the adjusted basis of the assets

that were transferred, and the taxpayer remained personally

liable for the liabilities that were transferred to the

corporation.   We stated that, “While the * * * [taxpayer]

nevertheless remained personally liable for the payment of such

liabilities, * * * there is no requirement in section 357(c)(1)

that the transferor be relieved of liability” and held that the

taxpayer had to recognize a gain under section 357(c) to the

extent that the liabilities that were assumed by the corporation,

or the liabilities to which the property that was transferred

might be subject, exceeded the taxpayer’s basis for the assets

that were transferred.   Id. at 18-19.

     Since the decision in Rosen, the Court has consistently held

that, even if the taxpayer remains liable on the transferred

debt, the taxpayer must recognize a gain under section 357(c) to

the extent that the sum of the amount of the liabilities that

were assumed, plus the amount of the liabilities to which the

property was subject, exceeds the taxpayer’s adjusted basis in

the assets that were transferred.   See Smith v. Commissioner, 84

T.C. 889, 909 (1985), affd. without published opinion 805 F.2d

1073 (D.C. Cir. 1986); Owen v. Commissioner, T.C. Memo. 1987-375,
                               - 10 -

affd. 881 F.2d 832, 835 (9th Cir. 1989); Beaver v. Commissioner,

T.C. Memo. 1980-429; see also sec. 1.357-2(a), Income Tax Regs.

     Petitioners rely on two Court of Appeals decisions, in which

the Courts of Appeals granted taxpayers relief from recognizing a

gain under section 357(c).    In Lessinger v. Commissioner, 872

F.2d 519 (2d Cir. 1989), revg. 85 T.C. 824 (1985), the difference

between the adjusted basis of the assets that were transferred

and the liabilities that were transferred to the corporation was

recorded as a loan receivable from the taxpayer to the

corporation.    The Court of Appeals held that, “where the

transferor undertakes genuine personal liability to the

transferee, ‘adjusted basis’ in section 357(c) refers to the

transferee’s basis in the obligation, which is its face amount.”

Id. at 526.    As a result of the inclusion of the face value of

the loan receivable in the adjusted basis of the assets that were

transferred, there was no gain to recognize under section 357(c).

See id.

     In Peracchi v. Commissioner, 143 F.3d 487 (9th Cir. 1998),

revg. T.C. Memo. 1996-191, the difference between the adjusted

basis of the assets that were transferred and the liabilities

that were transferred to the corporation was recorded as a

personal note from the taxpayer to the corporation.    The Court of

Appeals held that the taxpayer had a basis in the personal note
                              - 11 -

equal to the face value of the note and that there was no gain to

recognize under section 357(c).   See id. at 496.

     Respondent argues that the structure of petitioners’ section

351 transaction was not the same as the structure of the

taxpayers’ transactions in Lessinger and Peracchi in that

petitioners did not contribute loan receivables or personal notes

to Seggerman Farms that would cover the difference between the

transferred liabilities and the adjusted basis of the transferred

property.   Petitioners argue that their personal guaranties of

corporate indebtedness are the equivalent of loans receivable or

personal notes to the corporation because they remained liable

for the corporate debt even after the section 351 transaction.

     We agree with respondent.    Petitioners’ personal guaranties

of corporate debt are not the same as incurring indebtedness to

the corporation because a guaranty is merely a promise to pay in

the future if certain events should occur.   Petitioners’

guaranties do not constitute economic outlays.    Cf. Estate of

Leavitt v. Commissioner, 875 F.2d 420, 422 (4th Cir. 1989)

(taxpayers experienced no such call as guarantors, engaged in no

economic outlay, and suffered no cost), affg. 90 T.C. 206 (1988);

Brown v. Commissioner, 706 F.2d 755, 756 (6th Cir. 1983) (“the

courts have consistently required some economic outlay by the

guarantor in order to convert a mere loan guaranty into an

investment”), affg. T.C. Memo. 1981-608 (1981).     Petitioners are
                              - 12 -

contingently liable only to the secured creditors of Seggerman

Farms, namely Minonk State Bank.

     Although the Court of Appeals for the Seventh Circuit, to

which these cases are appealable, has not decided a case squarely

on point, that court refused to give a restrictive interpretation

to the statute and denied relief to a taxpayer with a section

357(c) gain in Testor v. Commissioner, 327 F.2d 788 (7th Cir.

1964), affg. 40 T.C. 273 (1963).    In Testor, a taxpayer

transferred the assets and the liabilities of his sole

proprietorship to a corporation.    The liabilities were assumed by

the corporation and were in excess of the aggregate book value of

the assets that were transferred.   None of the assets were

specifically encumbered by the liabilities, and for that reason

the taxpayer argued that section 357(c) did not apply.      In

interpreting section 357(c), the Court of Appeals affirmed the

decision of the Tax Court and held that “both the language and

legislative history indicate that section 357(c) is meant to

apply wherever liabilities are assumed or property is transferred

subject to liability.”   Id. at 790.    The taxpayer was liable for

tax on the gain under section 357(c).

     Petitioners contend that their secured creditors insisted

that they incorporate in order to restructure their business debt

and procure additional credit for the upcoming crop season.

Petitioners maintain that they realized no personal net gain and
                               - 13 -

no relief from their financial burdens as a result of the section

351 transaction and that the recognition of gain is unfair under

these circumstances.   Despite the reasons for or the results of

petitioners’ section 351 transaction, petitioners are responsible

for the tax consequences.    The U.S. Supreme Court has observed

repeatedly that, “while a taxpayer is free to organize his

affairs as he chooses, nevertheless, once having done so, he must

accept the tax consequences of his choice, whether contemplated

or not, * * * and may not enjoy the benefit of some other route

he might have chosen to follow but did not.”    Commissioner v.

National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149

(1974) (citations omitted).

     In 1999, Congress enacted changes to section 357(c) that

were effective for transactions occurring after October 18, 1998.

See Miscellaneous Trade and Technical Corrections Act of 1999,

Pub. L. 106-36, sec. 3001(e), 113 Stat. 127, 184.    The amendment

struck the words ”plus the amount of liabilities to which the

property is subject,” from section 357(c)(1) and essentially

provided relief for the taxpayer who transferred assets subject

to liabilities and remained personally liable on the debt, but

where the corporation did not assume the liability.    Id. sec.

3001(d)(4), 113 Stat. 182.    Congress also added section 357(d),

which provides guidance in determining the amount of liabilities

that are assumed and states in section 357(d)(1)(A) that “a
                             - 14 -

recourse liability (or portion thereof) shall be treated as

having been assumed if * * * the transferee has agreed to, and is

expected to, satisfy such liability (or portion), whether or not

the transferor has been relieved of such liability”.    Id. sec.

3001(b), 113 Stat. 182.

     The 1999 amendment does not apply to these cases, because

the transactions in these cases occurred in 1993.    Even if

section 357(d)(1)(A) as enacted in 1999 did apply, petitioners’

personal liability on the debt that was transferred to the

corporation would continues to be irrelevant.   Even after

congressional amendments to section 357, Congress has refrained

from providing relief to taxpayers in petitioners’ situation.

     We conclude that under section 357 petitioners must

recognize a gain on the transfer of assets to Seggerman Farms.

     To reflect the foregoing and concessions of the parties,

                                        Decisions will be entered

                                   under Rule 155.
