This appeal requires application of the provisions of the Internal Revenue Code of 1954 that relate to the deferment of tax liability upon a transfer of property by a taxpayer to a corporation that he controls.

In general, whenever a taxpayer sells or exchanges property, the gain realized on the sale or exchange must be recognized for tax purposes.1 The strict application of this principle to an exchange of property for stock in a newly-formed corporation would probably deter the organization of new corporations for valid business purposes. Hence, Congress has permitted deferment of such tax liability through the provisions of 351 of the 1954 Code2 in cases in which the taxpayer transfers property to a corporation solely in exchange for stock if, immediately following the transaction, he controls the transferee corporation. If the transfer is made in consideration of stock and other property or money ('boot'), gain must be recognized to the extent of the other property or money.3 In 1938, in United States v. Hendler, 303 U.S. 564, 58 S. Ct. 655, 82 L. Ed. 1018 (1938), the Supreme Court held that an assumption of the taxpayer's liabilities in what would be an otherwise tax-free exchange within 351(a) constituted 'other property or money' as defined in 351(b), and thus the gain had to be recognized to the extent of the liability assumed. Since transactions with the purpose of transforming a proprietorship or partnership into a corporation typically involve an assumption of the liabilities of the old entity, Congress perceived that the Hendler result imposed an unnecessary hardship in such a situation.4 In an attempt to alleviate this problem and yet prevent the tax deferment from encouraging schemes to avoid taxes, Congress enacted 357.5 Under that section if a corporation involved in an otherwise tax-free exchange under 351(a) assumes a liability of the transferor, the assumption will not be considered 'other property or money' and no gain will be recognized with respect to the liabilities assumed. However, if the taxpayer's principal purpose in having the newly-formed corporation assume the liability is to avoid taxes or is not a bona fide business purpose, the assumption must be treated as 'boot' to the taxpayer and the gain recognized as provided in 351(b). The sole question presented in the instant case is whether the district court properly held that the taxpayer's principal motive in having his personal liability assumed by a newlyformed corporation which he controlled was a 'bona fide business purpose.'

The taxpayer, Clifford W. Wheeler,6 had been associated for many years prior to 1958 with the Southland Corporation, whose activities included the operation and management of 7-Eleven Stores. In 1954, the taxpayer joined with a group to organize an operation in Florida. As a result, the taxpayer became owner of a nine per cent interest in 7-Eleven Stores of Florida, a partnership, and a nine per cent interest in 7-eleven, Inc., of Florida, a corporation. The partnership flourished, but its management maintained a policy of reinvesting a substantial portion of its profits in the business. During fiscal 1958, taxpayer's share of the profits exceeded $36,000, and his individual income tax attributable to partnership earnings amounted to approximately $17,000. However, only $7,200 was actually distributed during the taxable year 1958. Since the amount distributed was insufficient to cover the tax liability allocable to the taxpayer's share of the partnership earnings for that year, it was necessary that he borrow sufficient funds to cover this liability. Taxpayer admits that on March 1, 1958, the partnership had enough cash on hand for the taxpayer to draw out his share of the undistributed profits ($11,049.96).7 This amount could, of course, be withdrawn without his incurring any additional tax burden.8 Because of the partnership's policy of plowing most of its earnings back into the venture and because of the strong personality of Mr. Thompson, the founder of the 7-Eleven enterprises and the leading figure in the management of 7-Eleven Stores of Florida, the taxpayer found it embarrassing to ask for permission to withdraw his share of the undistributed profits.

The above circumstances led the taxpayer to implement certain advice given to him by his attorney and accountant. Prior to the time his 1958 taxes fell due, he borrowed $12,000 from the Republic National Bank of Dallas, assigning as security for the loan a three per cent interest in the corporation and a three per cent interest in the partnership. Three days later the taxpayer transferred these two encumbered property interests to The Wheeler Company, a corporation that he created after the $12,000 loan was consummated, in exchange for all its capital stock and for the assumption of the $12,000 note made to the Republic Bank and accrued interest on that obligation of $3.33. At the time the original loan was made, taxpayer intended that The Wheeler Company would assume his liability to the bank.

The Internal Revenue Service determined that the assumption of the personal note to the bank constituted 'boot' to the taxpayer and that, as provided in 351(b), gain should be recognized to the extent of $12,003.33.9 Taypayer paid the deficiency and interest which had been assessed, and instituted this suit for refund in the district court. The trial judge held in the taxpayer's favor, concluding that the assumption was effected for a bona fide business purpose and not for the purpose of avoiding taxes10 and, therefore, that the transaction fell within 357(a) and 351(a). Hence, the court held that no gain had to be recognized on the transfer.

Taking into consideration the circumstances surrounding the assumption of the liability, we conclude that as a matter of law the taxpayer did not sustain his burden of demonstrating 'by a clear preponderance of the evidence,' 26 U.S.C.A. 357(b)(2), that the assumption was effected for a bona fide business purpose. We therefore reverse.

It seems clear that the taxpayer's principal reason for the creation of The Wheeler Company, the transfer of the three per cent interests in the Florida partnership and corporation, and the effectuation of the assumption of the $12,000 note was to facilitate the payment of his personal tax liability for 1958.11 More specifically, it was to avoid the embarrassment of asking permission to withdraw this amount.12 We assume, for purposes of deciding this appeal, that taxpayer's asserted apprehension in this regard was reasonable.

The payment of one's personal tax liability, even if it is derived in part from business enterprises, is a purely personal obligation. We do not perceive how, in the circumstances of the instant case,13 facilitation of its payment can be a bona fide business purpose for arranging an assumption of the taxpayer's personal note by a controlled corporation. Embarrassment arising from the personalities and relations of partners in a business venture, even if that embarrassment was considered by one partner a sufficient deterrent to cause him to refrain from asking for his undistributed share of the earnings of the business, cannot be classified as a bona fide business purpose for causing a controlled corporation to assume his personal indebtedness. Indeed, the legislative history indicates that 357 was designed primarily to protect assumptions and transfers which follow in the ordinary course from the conversion of a business from one form to another, and the cases have generally reached results consistent with this approach.14 While an assumption need not always be incident to the transfer of a business, it must be closely related to the taxpayer's business or motivated primarily by business, not personal, considerations. In the instant case, the considerations behind the taxpayer's having the liability assumed were primarily personal and gain must be recognized to the extent of the assumption.

Reversed.