United States Tax Court

United States Tax Court

166 T.C. No. 3

CONTINENTAL GRAND LIMITED PARTNERSHIP, CENTURY

SUBSIDIARY CORPORATION, TAX MATTERS PARTNER,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 859-22.

Filed March 2, 2026.

—————

FC was a German holding company that wholly

owned FS, also a German entity. In March 2001, FC issued

to FS a promissory note with a face value of $610 million.

USC, a U.S. company and FC’s ultimate parent,

guaranteed the note. FS contributed the note to PS, a

partnership subject to the audit and litigation procedures

of the Tax Equity and Fiscal Responsibility Act of 1982,

Pub. L. No. 97-248, 96 Stat. 324.

In April 2002, FS elected to be disregarded as an

entity separate from FC, effective March 2001, a few days

before the date FC issued its note to FS.

In March 2009, FC paid more than $1 billion to PS

in satisfaction of its note and deferred interest. FS

subsequently withdrew from PS and received a

distribution of more than $1 billion.

R examined PS’s 2009 return and issued a Notice of

Final

Partnership

Administrative

Adjustment,

determining (among other things) that FC’s basis in its

interest in PS was initially zero and that PS’s basis in the

contributed promissory note was initially zero. P, the tax

Served 03/02/26

2

matters partner of PS, petitioned this Court to challenge

R’s determinations.

R filed a Motion for Partial Summary Judgment,

asking the Court to find that (1) FC’s adjusted basis in the

note at the time of the contribution was zero, (2) FC’s basis

in its interest in PS following the contribution was zero,

and (3) PS’s basis in the note following the contribution was

zero. P objects to R’s Motion.

Held: FS’s election to be disregarded as an entity

separate from FC caused FC’s issuance of the note to FS to

be disregarded and FS’s contribution of the note to PS to be

treated as FC’s contribution of its own note to PS.

Held, further, FC’s adjusted basis in its own note

when it contributed the note to PS was zero.

Held, further, FC’s basis in its interest in PS

immediately following the contribution was zero.

Held, further, PS’s basis in the note immediately

following the contribution was zero.

Held, further, R’s Motion will be granted.

—————

Allen Duane Webber, Joseph B. Judkins, and Vivek A. Patel, for

petitioner.

Charles E. Buxbaum, M. Jeanne Peterson, Christine S. Irwin, Travis

Vance, Justin G. Meeks, Archana Ravindranath, and Kaitlyn N. Griffith,

for respondent.

OPINION

TORO, Judge: This action under the Tax Equity and Fiscal

Responsibility Act of 1982, Pub. L. No. 97-248, 96 Stat. 324, presents a

novel question concerning interactions between the entity classification

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rules set out in Treasury Regulation §§ 301.7701-1, -2, and -3 1

(colloquially known as the check-the-box regulations) and the rules

providing the basis consequences of a partner’s contribution of property

to a partnership.

Our Court has previously held that a partner who contributes his

own note to a partnership in exchange for a partnership interest takes

no basis in the interest. E.g., VisionMonitor Software, LLC v.

Commissioner, T.C. Memo. 2014-182, at *10 (collecting cases).

Here, a disregarded entity received a promissory note from its

owner and then contributed that note to a newly formed partnership in

exchange for an interest in that partnership. In a Motion for Partial

Summary Judgment, the Commissioner asks us to treat the note as

though it was contributed from the owner directly to the partnership

and thus hold that the owner had no basis in the note at the time of the

contribution.

Petitioner, Century Subsidiary Corp. (Century), tax matters

partner of Continental Grand Limited Partnership (Partnership), asks

us to look behind the disregarded entity’s elected status and hold that

there was a substantial basis in the promissory note at the time of its

contribution.

The text of the entity classification regulations, the statutory and

regulatory provisions governing contributions to partnerships, and our

prior decisions regarding contributions of promissory notes lead us to

grant the Commissioner’s Motion.

Background

The following facts are derived from the parties’ pleadings, their

Motion papers, and the First Stipulation of Facts with attached

Exhibits. They are stated solely for the purpose of ruling on the Motion

before us and not as findings of fact in this case. See Rowen v.

Commissioner, 156 T.C. 101, 103 (2021) (reviewed).

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all

relevant times, and Rule references are to the Tax Court Rules of Practice and

Procedure.

4

I.

CSC Germany and CSC Financial

At all relevant times, CSC Computer Sciences GmbH (CSC

Germany) was a holding company that wholly owned German

subsidiaries engaged in an active IT services business. CSC Germany

was incorporated in Germany. One of its wholly owned subsidiaries was

CSC Financial GmbH (CSC Financial), which was also incorporated in

Germany.

II.

Issuance of the Promissory Note

On March 26, 2001, CSC Germany issued to CSC Financial a

promissory note (Note). The Note provided that its issue price was

$610,220,155. 2 Computer Sciences Corp. (CSC), the ultimate U.S.

parent of CSC Germany and CSC Financial, guaranteed the Note.

The Note specified that CSC Germany would pay $1,104,490,847

to the holder of the Note on August 17, 2009. That amount reflected the

issue price and deferred interest. The Note was a legal, valid, and

binding obligation of CSC Germany and was enforceable against CSC

Germany in accordance with its terms. The parties have stipulated that

the fair market value of the Note on March 26, 2001, was $610,220,155.

III.

Formation of the Partnership and Assignment of the Note

The Partnership was organized as a limited partnership under

Nevada law as of March 23, 2001. At all relevant times, the Partnership

owned computer equipment and related property that it leased to

affiliates within the CSC consolidated group. The Partnership’s

principal place of business is in Virginia. 3

On March 26, 2001, CSC Financial assigned the Note to the

Partnership as consideration for its limited partnership interest in the

Partnership. Beginning March 26, 2001, and until March 19, 2009, the

Partnership had three partners: CSC Financial, Century Credit Corp.,

and Century (the petitioner here).

2 The record is not clear as to whether CSC Financial transferred cash to CSC

Germany in exchange for the Note. For purposes of this Opinion, we assume (in

Century’s favor) that it did.

3 Absent stipulation to the contrary, see I.R.C. § 7482(b)(2), appeal of this case

would lie to the U.S. Court of Appeals for the Fourth Circuit, see I.R.C. § 7482(b)(1).

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IV.

CSC Financial’s Election to Be Disregarded

On April 12, 2002, more than a year after assigning the Note to

the Partnership, CSC Financial elected to be disregarded as an entity

separate from CSC Germany under Treasury Regulation § 301.77013(c). CSC Financial’s election was effective March 23, 2001. That is, the

election was retroactively made effective to a time before CSC Financial

contributed the Note to the Partnership.

V.

Payment in Satisfaction of the Note and Liquidation of CSC

Financial’s Interest in the Partnership

Nearly eight years after the formation of the Partnership, on

March 16, 2009, CSC Germany, the Partnership, and CSC Financial

entered into an addendum to the Note. Under the addendum, CSC

Germany agreed to prepay its obligations under the Note by transferring

$1,072,774,990 to the Partnership. The transfer took place the same

day.

Also that day, CSC Financial liquidated its interest in the

Partnership. To effect the liquidation, the Partnership distributed

$1,080,540,963 to CSC Financial.

VI.

The Partnership’s Tax Return and the Notice of Final Partnership

Administrative Adjustment

The Partnership filed Form 1065, U.S. Return of Partnership

Income, for the taxable year 2009. The Commissioner examined the

Partnership’s return and issued a Notice of Final Partnership

Administrative Adjustment on November 1, 2021.

On Form 886–A, Explanation of Adjustments, the Commissioner

stated his position that CSC Germany should be treated as having had

zero basis in the Note; that CSC Germany should be treated as having

zero basis in its interest in the Partnership as of the date of the

contribution; and that the Partnership should be treated as having zero

basis in the Note as of the date of the contribution. 4 Century timely

petitioned our Court for review.

4 Century tells us that the basis determinations at issue are central to the

computation of a foreign currency translation loss under section 987 that CSC

Germany claimed in 2009. The computation of the loss is not addressed in the Motion,

and we do not discuss that computation further.

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VII.

Motion for Partial Summary Judgment

In his Motion, the Commissioner seeks rulings on three issues:

(1) CSC Germany’s adjusted basis in the Note when the Note was

contributed to the Partnership; (2) CSC Germany’s basis in the

partnership interest immediately after the contribution; and (3) the

Partnership’s basis in the Note immediately after its contribution.

Century objects to the Commissioner’s Motion.

Discussion

I.

Summary Judgment Standard

The purpose of summary judgment is to expedite litigation and

avoid costly and unnecessary trials. FPL Grp., Inc. & Subs. v.

Commissioner, 116 T.C. 73, 74 (2001).

Summary judgment is

appropriate when the movant shows there is no genuine dispute as to

any material fact and the movant is entitled to judgment as a matter of

law. Rule 121(a)(2); Sundstrand Corp. v. Commissioner, 98 T.C. 518,

520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). In considering the Motion,

the Court construes factual materials and inferences drawn from them

in the light most favorable to the nonmoving party. Sundstrand Corp.,

98 T.C. at 520.

Before addressing the basis consequences of the transactions

among CSC Germany, CSC Financial, and the Partnership, we must

determine how the tax law views those transactions. Thus, we turn first

to the effect of CSC Financial’s election to be disregarded as an entity

separate from CSC Germany.

II.

Effect of CSC Financial’s Election to Be Disregarded

A.

Entity Classification and the Check-the-Box Regulations in

General

The tax treatment of a business entity turns, in part, on what type

of entity it is. See Moore v. United States, 144 S. Ct. 1680, 1685 (2024)

(comparing the taxation of S corporations, other corporations, and

partnerships); Estate of Jackson v. Commissioner, T.C. Memo. 2021-48,

at *76 (“The choice of entity can have big effects on the tax consequences

that a business faces.”); see also 8 Mertens Law of Federal Income

Taxation § 33:1, Westlaw (database updated December 2025) (“Taxation

considerations of choosing an entity include the applicable taxation and

rates of the entity, the opportunities for income-shifting, the available

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accounting methods, the loss limitation rules, the alternative minimum

tax, and compliance requirements.” (Footnotes omitted.)).

The Secretary promulgated the check-the-box regulations to

provide rules for classifying business entities.

See Treas. Reg.

§§ 301.7701-1 to -3. Under the regulations, entities with certain

characteristics are automatically classified as corporations. Treas. Reg.

§ 301.7701-2(b) (defining “corporation” for federal tax purposes).

Entities that are not classified as corporations under Treasury

Regulation § 301.7701-2(b) can elect their tax treatment. Treas. Reg.

§ 301.7701-3(a). As relevant here, a foreign entity with a single owner

may elect to be treated as an association (and thus a corporation) or to

be disregarded as an entity separate from its owner. 5 Id.

When an entity previously classified as an association elects to be

disregarded, the following is deemed to occur: “The association

distributes all of its assets and liabilities to its single owner in

liquidation of the association.” Id. para. (g)(1)(iii). Thereafter, “its

activities are treated in the same manner as a sole proprietorship,

branch, or division of the owner.” Treas. Reg. § 301.7701-2(a).

A disregarded entity is not, however, invisible for all federal tax

purposes. Treasury regulations provide for certain circumstances (not

applicable here) in which a disregarded entity is treated as an entity

separate from its owner. See id. para. (c)(2)(iii) (providing rules related

to refunds and credits of federal tax, as well as federal tax liabilities for

periods in which the entity was not disregarded and federal tax

liabilities of another entity for which the entity is liable). Additionally,

this Court has held that the entity classification regulations do not

render a single-member limited liability company (LLC) invisible for the

purpose of valuing a gift of an interest in the LLC. Pierre v.

Commissioner, 133 T.C. 24, 35 (2009) (“[W]e do not agree that the checkthe-box regulations apply to disregard the LLC in determining how a

5 An election under Treasury Regulation § 301.7701-3 can be made

retroactively. See id. para. (c)(1)(iii) (“The effective date specified [for the election] can

not be more than 75 days prior to the date on which the election is filed . . . .”). In this

case, the parties have stipulated that CSC Financial’s April 2002 election was effective

March 23, 2001, outside the 75-day period. But Treasury Regulation §§ 301.9100-1,

-2, and -3 provide standards the Commissioner uses to determine whether to extend

the time to make regulatory elections like the one at issue. Although the record is

silent on this point, in view of the parties’ stipulation as to the effective date of the

election, we assume that the Commissioner exercised his discretion to grant such an

extension here.

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donor must be taxed under the Federal gift tax provisions on a transfer

of an ownership interest in the LLC.”), supplemented by T.C. Memo.

2010-106.

B.

Application to CSC Financial

As of March 23, 2001, CSC Financial was classified as an

association under the check-the-box regulations. When CSC Financial’s

election became effective, on March 23, 2001, CSC Financial was

deemed to have liquidated and distributed its assets and liabilities to

CSC Germany. See Treas. Reg. § 301.7701-3(g)(1)(iii). After that date,

for federal tax purposes, CSC Financial had no assets of its own.

Importantly, the deemed distribution included all of CSC Financial’s

cash, meaning that any cash CSC Financial subsequently lent to CSC

Germany belonged to CSC Germany and not CSC Financial for federal

tax purposes. And from March 23, 2001, onward, CSC Financial’s

activities were treated as activities of a branch or division of CSC

Germany. See Treas. Reg. § 301.7701-2(a).

As a result, as relevant here, the issuance of the Note by CSC

Germany to CSC Financial on March 26, 2001, must be disregarded for

federal tax purposes. And, since CSC Financial was, on March 26, 2001,

no longer regarded as an entity separate from its owner, its assignment

of the Note to the Partnership is treated as if it were undertaken by a

branch or division of CSC Germany. So, from a federal tax perspective,

CSC Germany is viewed as having contributed its own note to the

Partnership in exchange for a partnership interest.

Such a view of the transactions at issue here does not, as Century

contends, “destroy state-created property rights.” Pet’r’s Resp. 57.

Whether CSC Germany became indebted to CSC Financial, and whether

CSC Financial transferred a promissory note to the Partnership, are

questions of state property law, not federal tax law. As the Supreme

Court has observed, “[s]tate law creates legal interests and rights.” See

Morgan v. Commissioner, 309 U.S. 78, 80 (1940). But “[t]he federal

revenue acts designate [how the] interests or rights, so created, shall be

taxed.” Id.

The U.S. Court of Appeals for the Ninth Circuit has helpfully

explained that the answers to questions of state law are not disturbed

by applying the entity classification regulations:

True, a single-member LLC’s corporate form may be

disregarded for federal tax purposes. But, as the language

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of Treasury Regulations § 301.7701-2(a) itself plainly

indicates, that form is merely disregarded, not altered. In

other words, the corporate form persists, but the tax

consequences change.

Seaview Trading, LLC v. Commissioner, 858 F.3d 1281, 1287 (9th Cir.

2017). Similarly, even when transactions between a disregarded entity

and its parent are disregarded for federal tax purposes, their existence

or character for state law purposes is not altered.

Nor is the classification of an entity as disregarded subject to an

exception for basis determinations. Century cites Pierre as an example

of a decision in which the Court looked past an entity’s disregarded

status. But Pierre merely refused to let an entity’s disregarded status

affect the valuation of an interest in that entity for gift tax purposes: It

analyzed the transfer of interests in a disregarded entity at the owner

level. It said nothing about basis determinations and did not assign tax

consequences to the transactions between a disregarded entity and its

owner, as Century would have us do here.

Having determined how the relevant transactions are viewed for

tax purposes, we turn to the basis consequences of CSC Germany’s

contribution of the Note to the Partnership.

III.

Basis of CSC Germany’s Partnership Interest

A.

Analysis

Section 705 sets out rules for determining the adjusted basis of a

partner’s interest in a partnership. It provides that the adjusted basis

of a partner’s interest shall be the basis determined under section 722

or section 742, increased or decreased by certain amounts (including the

partner’s distributive share of partnership income and losses). I.R.C.

§ 705(a).

Section 722 applies to “an interest in a partnership acquired by a

contribution of property, including money, to the partnership.” 6 It

further provides that the basis of such an interest “shall be the amount

of such money and the adjusted basis of such property to the

contributing partner at the time of the contribution increased by the

6 Section 742 governs the determination of “basis of an interest in a partnership

acquired other than by contribution.”

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amount (if any) of gain recognized under section 721(b) to the

contributing partner at such time.” I.R.C. § 722.

The Commissioner argues, in his Motion and Reply, that the

contribution of the Note was not a “contribution of property” within the

meaning of section 722. Resp’t’s Mot. 26–28, 32; Resp’t’s Reply 15. By

contrast, Century urges that the Note “was ‘property’ within the

meaning of sections 722 and 723.” Pet’r’s Resp. 21.

Our Court has held that debt is considered property in the hands

of the holder. Norwest Corp. & Subs. v. Commissioner, 108 T.C. 265,

301 (1997). It is less immediately clear whether a promissory note is

property in the hands of the writer. 7 Cf. Gemini Twin Fund III v.

Commissioner, T.C. Memo. 1991-315, 62 T.C.M. (CCH) 104, 107

(assuming, as argued by the taxpayer, “that a note is property under

State law and for other purposes” and noting that “[u]ntil the note is

paid, it is only a contractual obligation to the partnership”), aff’d, 8 F.3d

26 (9th Cir. 1993) (unpublished table decision).

We need not, however, get bogged down by metaphysical

questions. To decide the Motion we assume, as Century urges, that the

contribution of the Note was a “contribution of property” within the

meaning of section 722. Under that assumption, we must still grant the

Motion.

Under section 722, the basis of CSC Germany’s interest in the

Partnership was equal to the adjusted basis of the Note in the hands of

CSC Germany at the time of the contribution. Except as otherwise

provided in subchapters C, K, and P, the adjusted basis of property is

the property’s basis, determined under section 1012, adjusted as

provided in section 1016. I.R.C. § 1011(a).

Section 1012, for its part, provides that “[t]he basis of property

shall be the cost of such property, except as otherwise provided.” I.R.C.

§ 1012(a). The cost of property is the amount paid for it. Treas. Reg.

§ 1.1012-1(a); see also Cost, Black’s Law Dictionary (4th ed. 1957)

7 Black’s Law Dictionary quotes John Salmond’s Jurisprudence for the

proposition that some usages of the term “property” exclude debts: “The law of property

is the law of proprietary rights in rem, the law of proprietary rights in personam being

distinguished from it as the law of obligations. According to this usage a freehold or

leasehold estate in land, or a patent or copyright, is property; but a debt or the benefit

of a contract is not . . . .” Property, Black’s Law Dictionary (12th ed. 2024) (quoting

John Salmond, Jurisprudence 423–24 (Glanville L. Williams ed., 10th ed. 1947)).

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(“Expense. . . . The price paid, as for an article purchased for exportation,

with all incidental charges paid at the place of exportation. . . . The

amount originally expended in performing a particular act or operation,

or for production or construction, as of a building.”); Cost price, Black’s

Law Dictionary (4th ed. 1957) (“That which is actually paid for goods.”);

Cost, Webster’s New International Dictionary (2d ed. 1954) (“The amount

or equivalent paid, or given, or charged, or engaged to be paid or given

for anything bought or taken in barter or for service rendered . . . .”). 8

Here, the Note in the hands of its maker had no cost. See

Lessinger v. Commissioner, 872 F.2d 519, 525 (2d Cir. 1989) (“Liabilities

by definition have no ‘basis’ in tax law generally or in section 1012 terms

specifically.”), rev’g on other grounds 85 T.C. 824 (1985); Oden v.

Commissioner, T.C. Memo. 1981-184, 41 T.C.M. (CCH) 1285, 1290

(“Since [the taxpayer] incurred no cost in making the note, its basis to

him was zero.”), aff’d, 679 F.2d 885 (4th Cir. 1982) (unpublished table

decision). That is, CSC Germany paid no amount, in money or property,

to create the Note. Nor did CSC Germany “engage to pay or give”

anything to someone else in exchange for that third person’s help in

making the Note. 9 The Note’s adjusted basis in CSC Germany’s hands

was therefore zero, as we have held in multiple similar cases. See Oden,

41 T.C.M. (CCH) at 1290; see also VisionMonitor Software, LLC v.

Commissioner, T.C. Memo. 2014-182, at *10; Dakotah Hills Offs. Ltd.

P’ship v. Commissioner, T.C. Memo. 1998-134, 75 T.C.M. (CCH) 2122,

2125; Gemini Twin Fund III, 62 T.C.M. (CCH) at 107.

B.

Century’s Counterarguments

Century raises several arguments in support of its claim that the

adjusted basis of the Note in CSC Germany’s hands was equal to its fair

market value of $610 million. None carries the day.

This definition remains largely unchanged.

(collecting dictionaries).

8

See Pet’r’s Resp. 28 n.16

9 Imagine, for example, that CSC Germany had hired a professional printer to

produce the Note and had agreed to pay the printer in the future for the preparation

of the Note. That type of payment would be covered by dictionary definitions of the

term “cost.” Century has made no effort to show that any such costs are at issue here.

See Rule 121(c)(1), (f)(2). And the dictionary definitions, as applied to the Note, do not

cover CSC Germany’s promise to pay the Partnership for an interest in the

Partnership, a promise that was memorialized by the Note. As we explain further

below, the promise to pay the Partnership was not a cost of the making of the Note.

See infra Discussion Part III.B.1.

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1.

Obligations as Costs and Commissioner v. Tufts

Century argues that “the common and ordinary meaning of ‘cost’

includes amounts engaged to be paid” and that the Supreme Court’s

holding in Commissioner v. Tufts, 461 U.S. 300 (1983), requires us to

include the amount of CSC Germany’s obligation in its basis in the Note

under section 1012. Pet’r’s Resp. 28–29.

This argument misses the mark. Section 1012 instructs us to

consider the cost paid by a taxpayer to acquire property. In Tufts, a

taxpayer borrowed in order to purchase real property. Commissioner v.

Tufts, 461 U.S. at 302. That borrowing, the Supreme Court held, was a

cost that increased the taxpayer’s basis in the real property. Id. at 307–

08 (“Because of the obligation to repay, the taxpayer is entitled to

include the amount of the loan in computing his basis in the property;

the loan, under § 1012, is part of the taxpayer’s cost of the property.”);

see also Bertoli v. Commissioner, 103 T.C. 501, 515 (1994) (“Ordinarily,

a purchaser’s cost basis under section 1012 includes both promissory

notes issued by the purchaser and any liabilities of the seller assumed

by the purchaser as consideration for the sale.” (Emphasis added.)).

In this case, section 722 requires us to examine not the cost of

CSC Germany’s partnership interest, but the cost of the Note itself. CSC

Germany’s obligation was not a cost of the Note. CSC Germany did not

acquire the Note by incurring its obligation—the Note merely evidences

the obligation. Consequently, neither Tufts nor the proffered dictionary

definitions support the view that CSC Germany’s obligation to make

payments under the Note is part of the cost of making the Note or

included in computing the adjusted basis of the Note.

2.

Efforts to Distinguish Our Prior Promissory Note

Cases

Century seeks to distinguish our prior cases. It contends that,

unlike the case before us, VisionMonitor Software, Dakotah Hills

Offices, Gemini Twin Fund III, and Oden dealt with notes that “lacked

the hallmarks of genuine indebtedness to create tax basis for a direct

and knowable tax benefit.” Pet’r’s Resp. 48. It further states that those

cases “applied the substance-over-form doctrine.” Pet’r’s Resp. 39.

Century misreads our past decisions. They do not address

whether certain promissory notes created genuine indebtedness. E.g.,

VisionMonitor Software, LLC, T.C. Memo. 2014-182, at *13 n.6 (“[T]he

relevant question isn’t whether the notes were a debt owed by the

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partners to VisionMonitor but whether the partners had basis in the

notes.”). Nor do they recharacterize promissory notes or contributions

thereof as another type of instrument or transaction under the

substance over form doctrine or related doctrines. Instead, they merely

apply the established rule that “the contribution of a partner’s own note

to his partnership isn’t the equivalent of a contribution of cash, and

without more, it will not increase his basis in his partnership interest.”

Id. at *10.

Nor does the foreseeability of the tax consequences here make a

difference. Century repeatedly stresses that the foreign-currency

translation loss CSC Germany experienced after its withdrawal from

the Partnership was unforeseen and unforeseeable. That may be true,

given fluctuations in relative currency values over the years that

followed CSC Germany’s contribution of the Note to the Partnership.

But it does not change the rules that apply when determining basis

under sections 722 and 723.

CSC Financial elected to be disregarded more than one year after

the formation of, and the relevant contribution to, the Partnership. CSC

Financial presumably made its choice because being disregarded was its

preferred classification, taking into account its knowledge of past events

and plans for the future. Century cannot now attempt to roll back the

election simply because it is preferable, with hindsight, for CSC

Financial to have been classified another way. See Commissioner v.

Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974)

(“[W]hile 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.”).

3.

Lessinger v. Commissioner

Commissioner

and

Peracchi

v.

Century also points to the decisions in Lessinger v. Commissioner,

872 F.2d 519, and Peracchi v. Commissioner, 143 F.3d 487 (9th Cir.

1998), rev’g T.C. Memo. 1996-191, as indicators that CSC Germany

should have received some basis in its partnership interest. These

decisions are inapplicable to the issues raised in the Commissioner’s

Motion.

To begin, both cases arose in the context of corporations and

involved the application of section 357(c), a Code provision different

14

from the ones before us. In Lessinger, the U.S. Court of Appeals for the

Second Circuit addressed whether a taxpayer who had contributed more

liabilities than assets to a corporation could avoid recognizing gain

under section 357(c) by promising to pay an amount to the corporation

equal to the excess contributed liabilities. Such a situation—where a

taxpayer attempts to avoid gain by offsetting excess liabilities

contributed to a corporation—is not present here. In this case, the

Partnership assumed none of CSC Germany’s liabilities as part of the

contribution, and CSC Germany recognized no gain as a result of the

contribution. In addition, CSC Germany made its contribution to a

partnership, not to a corporation.

Moreover, the Second Circuit interpreted section 357(c) to refer to

the transferee corporation’s adjusted basis in its property. Lessinger v.

Commissioner, 872 F.2d at 526. Here, by contrast, section 722 keys its

analysis to the transferor partner’s basis (and, for that matter, so does

section 723). The Second Circuit expressed doubt that the transferor

taxpayer had basis in his promise to pay the corporation. Lessinger v.

Commissioner, 872 F.2d at 525 (“The taxpayer could, of course, have no

‘basis’ in his own promise to pay the corporation $255,000, because that

item is a liability for him.”); id. at 526 n.6 (“The taxpayer, on the other

hand, attempts to convince us that, as an accrual basis taxpayer, he had

a ‘basis’ in his personal obligations to the corporation. We note,

however, that the fact that he would have had a liability on his books

does not require the conclusion that he had a ‘basis’ in it for tax

purposes.”).

The Ninth Circuit’s decision in Peracchi is similarly inapplicable.

Peracchi addressed a taxpayer who contributed a promissory note to a

closely held corporation in order to comply with a state regulation. In

its opinion, the Ninth Circuit stated that it was not talking about

partnership or S corporation issues, but only contributions to C

corporations. Peracchi v. Commissioner, 143 F.3d at 494 n.16 (“Our

holding therefore does not extend to the partnership or S Corp context.”).

By its own terms, Peracchi has no bearing on CSC Germany’s

contribution to a partnership.

*

*

*

We conclude that CSC Germany’s adjusted basis in the Note at

the time of contribution was zero. Pursuant to section 722, CSC

Germany took a zero basis in its partnership interest as well.

15

IV.

Basis of the Note in the Hands of the Partnership

Section 723 sets out the rule governing the basis of property

contributed to a partnership by a partner. It provides that such basis

“shall be the adjusted basis of such property to the contributing partner

at the time of the contribution increased by the amount (if any) of gain

recognized under section 721(b) to the contributing partner at such

time.”

As discussed in detail above, the adjusted basis of the Note to CSC

Germany at the time of the contribution was zero. CSC Germany

recognized no gain with respect to the contribution. Thus, the basis of

the Note in the hands of the Partnership was zero. 10

V.

Conclusion

CSC Financial’s election to be disregarded as an entity separate

from CSC Germany requires us to treat CSC Germany as though it

contributed the Note directly to the Partnership. The consequences of

that treatment for the basis of CSC Germany’s interest in the

Partnership, and the basis of the Note in the hands of the Partnership,

are straightforward. CSC Germany took a zero basis in its partnership

interest, and the Partnership took a zero basis in the Note. 11

Accordingly, we will grant the Commissioner’s Motion for Partial

Summary Judgment.

To reflect the foregoing,

An appropriate order will be issued.

10 Century argues that, as a result of this holding, the Partnership would have

gain when CSC Germany made payments on the Note. We are not sure we agree with

Century’s argument, but, in any event, we need not decide that issue here.

11 It remains possible that additional contributions to the Partnership by CSC

Germany, or other transactions with basis consequences in the years following CSC

Germany’s contribution to the Partnership, increased CSC Germany’s basis in its

partnership interest before its liquidation in 2009. We express no view on such

transactions.