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Seggerman Farms, Incorporated v. Commissioner of Internal Revenue

October 24, 2002


Appeal from the United States Tax Court. Nos. 16269-99, 16271-99, 16272-99, 16273-99--Mary Ann Cohen, Judge.

Before Bauer, Rovner, and Evans, Circuit Judges.

The opinion of the court was delivered by: Bauer, Circuit Judge.


Petitioners-Appellants Ronald and Sally Seggerman, Craig and Linda Seggerman, and Michael Seggerman (collectively, "the Seggermans") appeal from deficiency judgments entered against them in the United States Tax Court upholding the deficiency determinations of Respondent-Appellee Commissioner of Internal Revenue ("Commissioner") for the taxable years 1993 and 1994. The Seggermans challenge the Commissioner's recognition of certain transfers of property to Petitioner-Appellant Seggerman Farms, Inc. (hereinafter, "the Corporation"), as taxable gains under 26 U.S.C. § 357(c), *fn1 where such transfers were made subject to liabilities in excess of the taxpayer's basis in the property. Specifically, the Seggermans argue that no gain should be recognized where they personally guarantied the debts to which the transferred property was subject. We disagree and affirm the Tax Court's deficiency judgment.


Ronald and Sally Seggerman, their sons, Craig Seggerman and Michael Seggerman, and Craig's wife, Linda Seggerman, are grain and cattle farmers residing in Illinois. In March 1993, at the behest of the Seggermans' secured creditors, Ronald Seggerman incorporated Seggerman Farms, Inc., an Illinois corporation, which the family previously operated as a joint venture in Minonk, Illinois. *fn2 The stock of the Corporation 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 exchange for the stock they received in the Corporation, Ronald, Craig and Michael Seggerman each transferred assets to the Corporation subject to liabilities. The Corporation also assumed various farm-related liabilities of the three men. *fn3 In each case, the dollar amount of liabilities transferred to the Corporation exceeded the transferor's adjusted basis in transferred assets. The amount by which Ronald's transferred liabilities exceeded his adjusted basis in transferred assets totaled $332,702. For Craig, this excess amount equaled $91,394; for Michael, it amounted to $82,594.

Some time thereafter, the Corporation refinanced a portion of the transferred debt, incurring debts totaling $330,000, and the Corporation, with the Seggermans as comakers, borrowed an additional $407,000.

Though no family member ever directly received any loan proceed disbursements, the Seggermans remained secondarily liable as guarantors on all of the transferred debt. Specifically, Ronald executed a commercial guaranty and Sally, Craig, Linda and Michael executed unlimited, continuing personal guaranties of the Corporation's debt.

In July 1999, the Commissioner issued notices of deficiency of federal income tax to the Corporation and to the Seggermans for the taxable years 1993 and 1994. The deficiencies resulted, in part, from the Seggermans' failure to report as income on their federal tax returns the amount by which liabilities transferred to the Corporation exceeded the adjusted basis in the transferred assets. In October 1999, the Seggermans filed Petitions in the United States Tax Court for a redetermination of the deficiencies. The Seggermans argued that, as guarantors of the Corporation's debt, they were not relieved personally from any debt that the Corporation assumed or to which the transferred property was subject or that was refinanced pursuant to restructuring of corporate debt, and therefore they should not have to recognize any gain on the amount of the liabilities that exceeds the adjusted basis of the transferred assets. The Tax Court, after consolidating the Petitions, upheld the Commissioner's determinations of deficiency, concluding that the Seggermans must recognize a gain on the transfer of assets to the Corporation under I.R.C. § 357(c). Seggerman Farms, Inc. v. Comm'r, T.C. Memo 2001-99 (2001). The Seggermans now appeal from the decision of the Tax Court.


This Court retains exclusive jurisdiction to review decisions of the Tax Court pursuant to I.R.C. § 7482(a)(1). The parties submitted this case fully stipulated to the Tax Court for adjudication without a formal trial pursuant to Rule 122 of Practice and Procedure of the United States Tax Courts, and the facts are not in dispute. The Tax Court's determination that I.R.C. § 357(c) requires the Seggermans to recognize a gain on the transfer of property to the Corporation involves a question of law, subject to de novo review. Eyler v. Comm'r, 88 F.3d 445, 448 (7th Cir. 1996). As we have noted repeatedly, "we owe no special deference to the Tax Court on a legal question, but when we consider the application of the legal principle to the facts we will reject the Tax Court decision only if it is clearly erroneous." Whittle v. Comm'r, 994 F.2d 379, 381 (7th Cir. 1993). See also Gunther v. Comm'r, 909 F.2d 291, 294 (7th Cir. 1990); Prussner v. United States, 896 F.2d 218, 224 (7th Cir. 1990).

As a general rule, "[n]o gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in [I.R.C.] section 368(c)) *fn4 of the corporation." I.R.C. § 351(a). However, I.R.C. § 357(c)(1) provides the following exception to the non-recognition provision of § 351(a):

[I]f the sum of the amount of the liabilities assumed exceeds the total of the adjusted basis of the property transferred pursuant to [a § 351] 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. I.R.C. § 357(c)(1). The Seggermans' theory can be summarized as follows: Because they remained liable as guarantors on the debts assumed by the Corporation or debts to which property transferred to the Corporation was subject, the amount by which the transferred liabilities exceeded transferred assets should not be recognized as taxable gain. The Seggermans acknowledge that § 357(c) provides on its face that the excess amount must be recognized as a gain and that the case law in this jurisdiction favors such recognition. Nevertheless, they contend that the Tax Court erred in reaching a result that is entirely consistent with both statutory and case law. They urge this Court to disregard a long line of controlling precedent because, though it has not been overruled, it is somehow "outdated." They analogize to cases which are factually distinguishable from this one and then suggest that it was reversible error for the Tax Court "mechanically [to have] distinguished away" those precedents. Finally, the Seggermans argue, in the alternative, that this Court should exercise its equitable power to craft a judicial exception to the plain statutory language of § 357(c). These arguments are unavailing.

The Seggermans first contend that the Tax Court's reliance on Rosen v. Commissioner, 62 T.C. 11 (1974), and Testor v. Commissioner, 327 F.2d 788 (7th Cir. 1964), was misplaced because the "strict" and "mechanical" interpretations of the Rosen and Testor courts reflect "outdated" precedent. In Rosen, the Tax Court stated that "there is no requirement in section 357(c)(1) that the transferor be relieved of liability" for a gain to be recognized in a transfer of liabilities in excess of assets, noting that the provision "may produce a harsh result [and] . . . may even result in the realization of a gain for tax purposes where none in fact exists." Rosen, 62 T.C. at 18, 19. In Testor, this Court held "that both the language and the legislative history indicate that § 357(c) is meant to apply wherever liabilities are assumed or property is transferred subject to liability." Testor, 327 F.2d at 790. That the interpretations adopted in Rosen and Testor were either restrictive *fn5 or mechanical takes nothing away from their precedential value. After all, statutory interpretation is precisely the business of the judiciary. It is well within the ambit of this (or any other) Court to interpret statutory language as restrictively or mechanically as it deems appropriate, so long as it respects the bounds of controlling precedent and the Constitution. Nor does the age of the Rosen and Testor holdings diminish their precedential weight, contrary to the Seggermans' assertion that the Tax Court relied on "outdated ...

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