Question

Question 1) What is a carryover basis as it relates to property received by a corporation in a §351 transaction? What is the purpose of attaching a carryover basis to property received in a §351 transaction? Under what circumstances does property received by a corporation in a §351 transaction not receive a carryover basis? What is the reason for this rule? What is a substituted basis as it relates to stock received in exchange for property in a §351 transaction? What is the purpose of attaching a substituted basis to stock received in a §351 transaction?

Answer 1

Q - What is a carryover basis as it relates to property received by a corporation in a §351 transaction?

A - The carryover basis rule, the tax basis of property received by the corporation in a §351 exchange equals the property's tax basis in the transferor's hands (that is, the corporation carries over the shareholder's basis in the property).

Q - What is the purpose of attaching a carryover basis to property received in a §351 transaction?

A - This rule prevents the recipient of the property from getting a basis equal to fair market value in a non taxable transaction.

Q - Under what circumstances does property received by a corporation in a §351 transaction not receive a carryover basis? What is the reason for this rule?

A - When a shareholder recognizes gain as the result of receiving boot in a §351 transaction, the corporation adds the gain recognized by the transferor  to the basis it carries over on the property transferred

This rule prevents gain recognized by the shareholder on the transfer to be recognized a second time if the corporation subsequently disposes of the property in an otherwise taxable transaction

Q - What is a substituted basis as it relates to stock received in exchange for property in a §351 transaction? What is the purpose of attaching a substituted basis to stock received in a §351 transaction?

A - Under the substituted basis rule, the stock received in a §351 transfer equals the tax basis of the property transferred to the corporation. The formula to compute the stock's substituted basis is   Cash contributed + Tax basis of other property contributed - Liabilities assumed by the corporation on prop contributed = Substituted tax basis of stock received

The substituted basis rule preserves the gain or loss deferred in the transfer. If the shareholder sells the stock received at fair market value in a taxable transaction, the gain or loss recognized will equal the gain or loss deferred.