Tax Treatment of IRC 351 Nonrecognition Transactions aka Corporate Reorganizations

Check out the following 5 lessons I learned this week regarding IRC 351 nonrecognition transactions:

1. The basis assigned to stock received generally is the same as the basis in the property transferred to the corporation. If however you also receives boot from the corporation your basis must be decreased by the amount of any money received plus the fair market value of any other property received (aka BOOT).

2. Your basis under IRC 358(a) must also be increased by the amount of any gain recognized due to any boot received. Specifically if you transfers property with an fair market value of $700,000 and a basis of $300,000 to a corporation in exchange for common stock with a fair market value of $500,000 and cash of $200,000 your basis in the stock is equal to $300,000 which is calculated as follows:

$300,000 basis in property transferred - $200,000 boot received (as cash) + $200,000 gain recognized due to receipt of boot.

3. When transferred property is subject to a liability that the corporation assumes, the amount of the liability generally is not treated as boot for purposes of determining any taxable gain on the transaction. However, the amount of the liability generally is treated as boot for purposes of determining your basis in the stock received. Specifically if you transfer property with a fair market value of $700,000 and an adjusted basis of $300,000 to a Corporation in exchange for common stock with an fair market value of $600,000 and the property transferred is subject to a liability of $100,000 that is assumed by the corporation your basis in the stock is equal to $200,000 calculated as follows:

$300,000 basis in property transferred - $100,000 boot received (as assumed liability) + $0 gain recognized due to receipt of boot.

4. Under IRC 357 if the sum of the amount of the liabilities assumed by the corporation exceeds the total adjusted basis of the property transferred in the exchange, the excess amount generally must be treated as gain from the sale or exchange of an asset. However, some liabilities are excluded in making this determination including payments that were deductions and payments for capital expenditures.

5. Under IRC 358 when basis in stock received exceeds the fair market value of the stock, your basis in the stock is reduced by the amount of any excluded liability that is assumed by the corporation in the exchange.

John R. Dundon, EA [720-234-1177, John@JohnRDundon.com]. John is a lifelong student of the US Tax Code; enrolled with the United States Treasury Department to practice before the IRS (Enrolled Agent # 00085353); under contract with the IRS as a Certified Individual Taxpayer Identification Number (ITIN) Acceptance Agent; regulated under USC 31 Section 330 & USC 26 Section 7525a.3.A; governed under US Treasury Cir. 230.

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Posted in 1031 Exchange, 1231 Exchange, Basis, Capital Gain, Capital Loss, Like/Kind Exchange, Sub-chapter S, Uncertain Tax Position

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