You are a senior manager at a large public accounting firm located in Reno, Nevada. One of your clients, Joel Nash, also a resident of Reno, Nevada, calls you with a tax question. Joel has operated his business as a sole proprietorship for many years but has decided to incorporate the business in order to limit his exposure to personal liability. One problem with this plan is that the liabilities of his sole proprietorship exceed the basis of the assets to be transferred to the corporation by $700,000 ($2,000,000 liabilities - $1,300,000 assets). Therefore, even though the transaction will qualify for tax-free incorporation under the nonrecognition provisions of Code Section 351, Joel would still be required to recognize a gain of $700,000 (the extent to which the liabilities transferred exceed the aggregate basis of assets transferred). Joel is not pleased with this result and asks you about the effect of drawing up a $700,000 note that he would then transfer to the corporation. Joel wants to know whether the note, which promises a future payment from himself to the corporation in the amount of $700,000, will enable him to avoid recognition of the gain. Please research the issue and write a tax research memorandum detailing the results of your research.

At a minimum your memorandum should cite: One internal Revenue Code section. Two court cases At least one case should be a U.S. Court of Appeals case (Circuit Court). One Revenue Ruling. One other primary source (other than an Internal Revenue Code Section), e.g., revenue ruling, revenue procedure, notice, etc.