In March, the Tax Court decided in Continental Grand Limited Partnership v. Commissioner, 166 TC No. 3 (Mar. 2, 2026), that the contribution to a partnership of one’s own promissory note does not create basis in the contributor’s partnership interest. On April 2, 2026, the taxpayer filed a motion for reconsideration, and on May 15, 2026, the IRS filed its objection to such motion. As reported in Tax Notes Federal on July 21, 2026, the taxpayer’s motion was denied. As of the date of this article, no appeal has yet been filed.

The result in Continental is not surprising, given the Tax Court’s prior position in a somewhat analogous arena. In this regard, in an arguably questionable manner, the Tax Court distinguishes Lessinger v. Commissioner, 872 F.2d 519 (2nd Cir. 1989), rev’g 85 TC 824 (1985), and Peracchi v. Commissioner, 143 F.3d 487 (9th Cir. 1998), rev’g TC Memo 1996-191, both of which cases held that a promissory note contributed to a corporation by a shareholder in an incorporation transaction provided the necessary basis to preclude §357(c) from applying to cause gain recognition (i.e., the note covered the excess of the liabilities assumed by the corporation over the tax basis of the contributed assets). How the Tax Court distinguished these appellate cases is beyond the scope of this article.

It would appear that there is a workaround to the Continental result, and a means of achieving basis for one’s own promissory note contributed to a partnership. What if a taxpayer does not provide its promissory note to the partnership, but, instead, the taxpayer borrows funds from the bank on a recourse basis and contributes those funds to the applicable flow-through entity? Then, the entity takes the funds and buys the taxpayer’s recourse note from the bank. The entity is now in the same position as if the taxpayer had given its own promissory note to the entity. Should this change the basis conclusion? While one can’t be sure that the IRS might not collapse the circular borrowing, it would appear that the taxpayer has some solid legs to stand on for a conclusion that the taxpayer now has obtained basis in its partnership interest. As an aside, keep in mind that there is no question that giving one’s note to purchase “property” provides basis in the property. Why does it make a difference to the Tax Court, if the “property” is an ownership interest in an entity?

Continental Grand and structuring around its holding will be discussed at this year’s Tax Planning Forum® program. We hope that you will consider attending either or both of the Forum or our Fundamentals of Flow-Through® programs either virtually or in-person or our new Fundamentals QAS self-study program. Registration is in full swing, and we encourage you to register soon, especially if you are interested in either of our in-person programs in Las Vegas or Orlando where space is limited.