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Mr. Creative Shareholder knew (from taking a tax course at a school other than Bentley University) that if there is a contribution of property in a transaction which will qualify for IRC section 351 treatment that has a liability associated with it, and the individual contributing the property is personally relieved from such debt such relief does not (as would usually be the case under IRC sec. 61(a)(11)) trigger discharge of indebtedness income. Mr. Creative Shareholder is going to engage in a transaction that will qualify for IRC section 351 treatment. He is planning to contribute real estate with a basis of $1M and a fair market value of $2M. There is no mortgage loan (or other debt) currently associated with the real estate. A week prior to executing the transfer of the real estate to the newly formed corporation Mr. Creative Shareholder stopped at his local savings and loan bank and borrowed $500K (which the bank was glad to advance to Mr. Shareholder since Mr. Shareholder gave the bank a mortgage on the real estate as security). A week after the loan transaction Mr. Creative Shareholder again stopped at the bank and requested that he be personally taken off the loan and that the new corporation be inserted in his place. Because, again, the bank was comfortable with the value of the real estate it agreed to replace the new corporation as the debtor in place of Mr. Shareholder. In light of the general rule of IRC section 351 and associated IRC sections, Mr. Creative Shareholder believes he has cleverly picked up $500K of cash without any income tax consequences. Explain if Mr. Creative Shareholder is correct, or not.

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