Sec. 358. Basis to distributees
 
(a) General rule
 In the case of an exchange to which section 351, 354, 355, 356,
 or 361 applies -
 (1) Nonrecognition property
 The basis of the property permitted to be received under such
 section without the recognition of gain or loss shall be the same
 as that of the property exchanged -
 (A) decreased by -
 (i) the fair market value of any other property (except
 money) received by the taxpayer,
 (ii) the amount of any money received by the taxpayer, and
 (iii) the amount of loss to the taxpayer which was
 recognized on such exchange, and
 (B) increased by -
 (i) the amount which was treated as a dividend, and
 (ii) the amount of gain to the taxpayer which was
 recognized on such exchange (not including any portion of
 such gain which was treated as a dividend).
 
Sections 351(a), 358(a)(1) Ex.1, 362(a), 1223(1) & (2)
 
 

 

 

Assumptions: Together, A, B and C own 100% of Newco. more than the 80% required for purposes of satisfying the 368(c) definition of control.

 

Treatment: No gain or loss is recognized by A, B or C. 351(a). A, B and C have bases in their stock of 30, 90 and 20, respectively, equal to the bases of assets transferred by each. 358(a)(1). Newco has carryover bases of 30, 90 and 20, respectively, in the land, cash and equipment. 362(a).

 

The holding periods of the stock and Newco's assets includes the holding periods of the assets transferred by A, B and C.

 

Sections 351(b), 358(a)(1) Ex. 2, (a)(2) Ex. 1

 
 

Treatment: 351(a) would apply to both A and B but for the receipt of boot. So, gain is recognized, but only to the extent of the FMV of boot received. A has recognized gain of 40, the lesser of A's realized gain of 60 and the 40 FMV of boot received by A. B has recognized gain of 35, the lesser of B's realized gain of 35 and the 50 FMV of boot received by B (30 cash plus 20 FMV of IBM stock). A and B have bases in their stock of 30 and 70, respectively. 358(a)(1). For A: 30 basis in land transferred plus 40 gain recognized less 40 FMV of boot received. For B: 85 basis in land transferred plus 35 gain recognized less 50 FMV of boot received. B has a basis of 20 (i.e., FMV) in the IBM stock. 358(a)(2).

 
 
 

Sections 351(b)(2), 358(a)(1) Ex. 3, (a)(2) Ex. 2

 

 

Treatment: 351(a) would apply to both A and B but for the receipt of boot. So, A will recognize gain, the lesser of A's realized gain of 60 and the 40 FMV of boot received by A. 351(b)(1). A will have a basis of 30 in the stock: land AB of 30 plus 40 gain recognized less 40 boot received. B will not recognize any of B's realized loss of 65 ((70 + 30 + 20) - 185) due to 351(b)(2). B's basis in the X stock will be 135, land AB of 185 less the 30 cash received and 20 FMV of IBM stock received. 358(a)(1). B has no basis adjustment for gain or loss recognized - there was none. B's basis in the IBM stock will be its FMV of 20. 358(a)(2).

 

 

Sections 358(a)(1) Ex. 4, (a)(2) Ex. 3, 362(b) Ex. 2

 

 
 

Assumptions: The transaction qualifies as an A reorganization with boot (368(a)(1)(A)).

 

Treatment: A and B have realized gain and loss of 30 and (15), respectively, but A recognizes gain of only 10, up to the FMV of boot received, (356(a)(1)), while B recognizes none of the loss (356(c)). P has no realized gain from the boot transferred, and it therefore recognizes no gain. 1001, 1032. T recognizes no gain. 361. A will have a basis in the P stock of 20: 20 AB in A's T stock + 10 gain recognized - 10 FMV of boot received. 358(a)(1). B will have a basis in the P stock of 55, B's AB of 65 in the T stock less the boot received of 10 cash. P will have AB of 35 in the newly acquired T assets, equal to T's AB of 35 increased by the 0 gain recognized by T.

 

 

Sections 362(b) Ex. 4, 358(a)(1) Ex. 5

 

 

Assumptions: The transaction is a C reorganization (368(a)(1)(C)).

 

Treatment: A Corp.'s basis in the P stock will be 40, the 40 basis that A had in the T stock increased by the 0 gain recognized by A, decreased by the 0 FMV of boot received by A. 358(a)(1). While 362(b) generally determines the basis of property acquired by a corporation, 362(b) generally determines the basis of property acquired by a corporation, 362(b) does not apply if the property acquired consists of stock or securities in a party to the reorganization, as is the case here. Furthermore, the exception to the exception in 362(b) does not apply because A did not use its stock as consideration for the exchange. Therefore, 362(b) is not applicable, but 358(a)(1) is.

 

 

 

Sections 355(c)(2)(A) Ex. 1, (c)(2)(B) Ex. 2, 356(b) Ex. 2, 358(a)(1) Ex.6, (a)(2) Ex.4, (c) Ex. 2

 
 
 

Assumptions: P and S have each owned and operated the Widget and Cog businesses, respectively, for more than 5 years.  The transaction is assumed to not be principally a device for the distribution of E&P.

 

Treatment:  The transaction would have qualified under 355 but for the distribution of boot, so 356 applies to A.  Under 356(b), A is treated as receiving a 301 distribution which might be treated as a dividend under 301(c)(1) if P has sufficient E&P.  A will presumably have a basis of 60 in S and 120 in P following the distribution ((180 + 80 - 80) allocated according to respective FMVs of P and S after the distribution).  358(a)(1) & (c) and Reg. 1.358-2(a)(1) & (2).  A will have a tacked holding period in S.  1223(1).  A will have FMV bases of 50 and 30, respectively, in the land and equipment. 

 

355(c) applies to P.  The stock of S is qualified property (355(c)(2)(B)) and so, P does not recognize the gain of 30 on the distribution of S stock.  P recognizes the gain of 30 on the distribution of the appreciated land (50 - 20), but does not recognize the realized loss of 10 on the distribution of the equipment.  355(c)(1), (2)(A).

 

Sections 368(a)(1)(C) Ex. 1, 354(a)(1) Ex. 1, 358(a)(1) Ex. 7, 361(a) Ex.1, (c)(1) Ex. 2, (c)(4) Ex. 2, 362(b) Ex. 5,

381(a) Ex. 1, (c)(1) Ex. 1, (c)(2) Ex. 3, 1032(a) Ex. 1, 1223(1) Ex. 1, (2) Ex. 1

 

 

Treatment:  The transaction is a C reorganization. 368(a)(1)(C).  T does not recognize gain or loss on the exchange of its assets for P stock.  361(a).  T also does not recognize gain or loss on the distribution of the P voting stock under 361(c)(1) and 336 does not apply to T.  361(c)(4).  P does not recognize gain on the use of its P stock.  1032(a).  A recognizes none of the realized gain of 200 (300 - 100), because A has received solely stock or securities of another party to the reorganization in exchange for stock or securities of a party to the reorganization.  354(a)(1).  A's basis in the stock received will equal 100, A's basis in the T stock surrendered.  358(a)(1).  A's holding period in the P stock will include A's holding period in the T stock.  1223(1).  P's bases in the T assets received will equal T's 200 bases in those assets .  362(b).  P's holding period in those assets will include T's holding period.  1223(2).  P will succeed to certain T attributes, including T's NOL carryover (subject to possible limitations) and T's E&P.  381(a), (c)(1) & (2).

 

Sections 356(c) Ex. 1, 358(a)(1) Ex. 8, (a)(2) Ex. 5

 
 
 

Treatment:  The transaction is an A reorganization.  368(a)(1)(A).  A has a realized loss of 70, AR 150 - AB 220.  354(a) would have applied but for A's receipt of boot.  356 therefore applies.  More particularly, A does not recognize any of the loss even though A received boot. 356(c).  A's basis in the land equals its FMV of 50.  358(a)(2).  A's basis in the P stock will equal 170 = A's basis in the T stock of 220 plus gain recognized by A of 0 less the FMV of boot received by A of 50.

 

 

 
 

Section 358(a)(1)(B)

 
 
 

Treatment: Because the value transferred by X to A exceeds the value received by X by 10, A will be deemed to have received a distribution of 10, treated as dividend income. Accordingly, A's basis in the stock will be 30: 30 AB in the land transferred + 10 dividend income + 10 gain to A that is not a dividend (351(b)) - 20 cash received.

 

 
 
 
 (2) Other property
 The basis of any other property (except money) received by the
 taxpayer shall be its fair market value.
 

Sections 351(b), 358(a)(1) Ex. 2, (a)(2) Ex. 1

 
 

Treatment: 351(a) would apply to both A and B but for the receipt of boot. So, gain is recognized, but only to the extent of the FMV of boot received. A has recognized gain of 40, the lesser of A's realized gain of 60 and the 40 FMV of boot received by A. B has recognized gain of 35, the lesser of B's realized gain of 35 and the 50 FMV of boot received by B (30 cash plus 20 FMV of IBM stock). A and B have bases in their stock of 30 and 70, respectively. 358(a)(1). For A: 30 basis in land transferred plus 40 gain recognized less 40 FMV of boot received. For B: 85 basis in land transferred plus 35 gain recognized less 50 FMV of boot received. B has a basis of 20 (i.e., FMV) in the IBM stock. 358(a)(2).

 
 
 

Sections 351(b)(2), 358(a)(1) Ex. 3, (a)(2) Ex. 2

 

 

Treatment: 351(a) would apply to both A and B but for the receipt of boot. So, A will recognize gain, the lesser of A's realized gain of 60 and the 40 FMV of boot received by A. 351(b)(1). A will have a basis of 30 in the stock: land AB of 30 plus 40 gain recognized less 40 boot received. B will not recognize any of B's realized loss of 65 ((70 + 30 + 20) - 185) due to 351(b)(2). B's basis in the X stock will be 135, land AB of 185 less the 30 cash received and 20 FMV of IBM stock received. 358(a)(1). B has no basis adjustment for gain or loss recognized - there was none. B's basis in the IBM stock will be its FMV of 20. 358(a)(2).

 

 

Sections 358(a)(1) Ex. 4, (a)(2) Ex. 3, 362(b) Ex. 2

 

 
 

Assumptions: The transaction qualifies as an A reorganization with boot (368(a)(1)(A)).

 

Treatment: A and B have realized gain and loss of 30 and (15), respectively, but A recognizes gain of only 10, up to the FMV of boot received, (356(a)(1)), while B recognizes none of the loss (356(c)). P has no realized gain from the boot transferred, and it therefore recognizes no gain. 1001, 1032. T recognizes no gain. 361. A will have a basis in the P stock of 20: 20 AB in A's T stock + 10 gain recognized - 10 FMV of boot received. 358(a)(1). B will have a basis in the P stock of 55, B's AB of 65 in the T stock less the boot received of 10 cash. P will have AB of 35 in the newly acquired T assets, equal to T's AB of 35 increased by the 0 gain recognized by T.

 

 

 

Sections 355(c)(2)(A) Ex. 1, (c)(2)(B) Ex. 2, 356(b) Ex. 2, 358(a)(1) Ex.6, (a)(2) Ex.4, (c) Ex. 2

 
 
 

Assumptions: P and S have each owned and operated the Widget and Cog businesses, respectively, for more than 5 years.  The transaction is assumed to not be principally a device for the distribution of E&P.

 

Treatment:  The transaction would have qualified under 355 but for the distribution of boot, so 356 applies to A.  Under 356(b), A is treated as receiving a 301 distribution which might be treated as a dividend under 301(c)(1) if P has sufficient E&P.  A will presumably have a basis of 60 in S and 120 in P following the distribution ((180 + 80 - 80) allocated according to respective FMVs of P and S after the distribution).  358(a)(1) & (c) and Reg. 1.358-2(a)(1) & (2).  A will have a tacked holding period in S.  1223(1).  A will have FMV bases of 50 and 30, respectively, in the land and equipment. 

 

355(c) applies to P.  The stock of S is qualified property (355(c)(2)(B)) and so, P does not recognize the gain of 30 on the distribution of S stock.  P recognizes the gain of 30 on the distribution of the appreciated land (50 - 20), but does not recognize the realized loss of 10 on the distribution of the equipment.  355(c)(1), (2)(A).

 

 

Sections 356(c) Ex. 1, 358(a)(1) Ex. 8, (a)(2) Ex. 5

 
 
 

Treatment:  The transaction is an A reorganization.  368(a)(1)(A).  A has a realized loss of 70, AR 150 - AB 220.  354(a) would have applied but for A's receipt of boot.  356 therefore applies.  More particularly, A does not recognize any of the loss even though A received boot. 356(c).  A's basis in the land equals its FMV of 50.  358(a)(2).  A's basis in the P stock will equal 170 = A's basis in the T stock of 220 plus gain recognized by A of 0 less the FMV of boot received by A of 50.

 
 
 
 
 (b) Allocation of basis
 (1) In general
 Under regulations prescribed by the Secretary, the basis
 determined under subsection (a)(1) shall be allocated among the
 properties permitted to be received without the recognition of
 gain or loss.
 

Section 358(b)(1)

 
 
 

Assumptions: The preferred has no provision for redemption.

 

Treatment: A does not recognize gain. 351(a). A's basis in all Newco stock received will be the 50 basis of the assets transferred to Newco. 358(a)(1). This basis is allocated in accordance with the relative FMV of the classes of stock received. 358(b)(1) and Reg. 1.358-2(b)(2). Hence, A will have a basis of 35 in the Newco common stock and 15 in the Newco preferred stock.

 

 
 
 (2) Special rule for section 355
 In the case of an exchange to which section 355 (or so much of
 section 356 as relates to section 355) applies, then in making
 the allocation under paragraph (1) of this subsection, there
 shall be taken into account not only the property so permitted to
 be received without the recognition of gain or loss, but also the
 stock or securities (if any) of the distributing corporation
 which are retained, and the allocation of basis shall be made
 among all such properties.
 
 

Section 358(b)(2)

 
 

Assumptions: The transaction qualifies under 355.

 

Treatment: No shareholder recognizes gain or loss. Each shareholder allocates their original basis in their X stock between their X stock and Y stock in proportion to the relative fair market values of the X and Y stock. Hence, A, B and C will have bases in the Y stock of 10, 20 and 20, respectively (per share bases of 1/3, 2/3, and 1/3, respectively). A, B and C will have bases in their X stock of 20, 40 and 40, respectively (per share bases of 1, 2, and 1, respectively).

 

 
 
 (c) Section 355 transactions which are not exchanges
 For purposes of this section, a distribution to which section 355
 (or so much of section 356 as relates to section 355) applies shall
 be treated as an exchange, and for such purposes the stock and
 securities of the distributing corporation which are retained shall
 be treated as surrendered, and received back, in the exchange.
 

Section 358(c) Ex. 1

 
 
 

Assumptions: The distribution qualifies under 355.

 

Treatment: No shareholder recognizes gain or loss. The shareholders are treated as having surrenderred and received back X stock for purposes of 355. 355(c). Accordingly, each shareholder allocates their original basis in their X stock between their X stock and Y stock in proportion to the relative FMV of the X and Y stocks. Hence, A, B and C will have bases in the Y stock of 10, 20 and 20, respectively (per share bases of 1/3, 2/3, and 1/3, respectively). A, B and C will have bases in their X stock of 20, 40 and 40, respectively (per share bases of 1, 2 and 1, respectively).

 

 

Sections 355(c)(2)(A) Ex. 1, (c)(2)(B) Ex. 2, 356(b) Ex. 2, 358(a)(1) Ex.6, (a)(2) Ex.4, (c) Ex. 2

 
 
 

Assumptions: P and S have each owned and operated the Widget and Cog businesses, respectively, for more than 5 years.  The transaction is assumed to not be principally a device for the distribution of E&P.

 

Treatment:  The transaction would have qualified under 355 but for the distribution of boot, so 356 applies to A.  Under 356(b), A is treated as receiving a 301 distribution which might be treated as a dividend under 301(c)(1) if P has sufficient E&P.  A will presumably have a basis of 60 in S and 120 in P following the distribution ((180 + 80 - 80) allocated according to respective FMVs of P and S after the distribution).  358(a)(1) & (c) and Reg. 1.358-2(a)(1) & (2).  A will have a tacked holding period in S.  1223(1).  A will have FMV bases of 50 and 30, respectively, in the land and equipment. 

 

355(c) applies to P.  The stock of S is qualified property (355(c)(2)(B)) and so, P does not recognize the gain of 30 on the distribution of S stock.  P recognizes the gain of 30 on the distribution of the appreciated land (50 - 20), but does not recognize the realized loss of 10 on the distribution of the equipment.  355(c)(1), (2)(A).

 
 
 (d) Assumption of liability
 (1) In general
 Where, as part of the consideration to the taxpayer, another
 party to the exchange assumed a liability of the taxpayer, such
 assumption shall, for purposes of this section, be treated as
 money received by the taxpayer on the exchange.
 

Sections 357(a) Ex. 1, 358(d)(1) Ex. 1

 
 

Treatment: Relief from liabilities is generally treated as though receiving cash and paying off those liabilities. However, in a transaction such as this where 351 would otherwise apply, transferring those liabilities will generally not be treated as the receipt of boot for purposes of applying 351 (357(a)), but will generally be treated as the receipt of boot for purposes of measuring shareholder basis. Accordingly, A will recognize none of A's realized gain and A will have a basis in the Newco stock of 15 (30 + 10 -25). B will recognize gain of 10 because the cash received is still boot. B's basis in the stock will be 30 (50 - 20 + 10 - 10).

 

 
 

Sections 357(c)(1), 358(d)(1) Ex. 2

 

Assumptions: A's land was a capital asset held long-term in A's hands. It will be used in Newco's business. Inventory will also be used in Newco's business. The liability is a note payable which was incurred years ago to purchase the assets transferred and there is no tax-avoidance issue associated with this liability.

 

Treatment: The general rule of 357(a) provides that A's relief from the liability will not be treated as boot for purposes of recognizing gain. 357(b) will not override here because there is no tax avoidance purpose and the liability was incurred for valid business purposes. 357(c) will apply because A has transferred assets with total bases of 40, 20 less than the liability. Accordingly, A will recognize gain of 20, 12 long-term capital gain (60 FMV of land/100 total FMV x 20) from the land and 8 ordinary gain (40 FMV of inventory/100 total FMV x 20). Reg. 1.357-2. A's basis in the Newco stock will be 0: 40 AB in assets transferred + 20 gain recognized - 60 boot received (entire note payable transferred is treated as boot for purposes of determining stock basis - 358(d)(1)).

 
 
 
 (2) Exception
 Paragraph (1) shall not apply to the amount of any liability
 excluded under section 357(c)(3).
 

Sections 357(c)(3)(A), 358(d)(2)

 
 

Assumptions: The ABZ partnership transfers the Services business, including the associated assets and liabilities. The liabilities consist of amounts owed to retired partners in liquidation of their partnership interests but not in exchange for their in partnership property. C is a cash basis taxpayer transferring C's interest in a sole-practitioner services business, including the associated assets and accrued but unpaid expenses.

 

Treatment: The liability transferred by ABZ is described in 357(c)(3)(A)(ii), a liability the payment of which would be described in 736(a). The liability transferred by C is described in 357(c)(3)(A)(i), a liability the payment of which would give rise to deduction. As such, these liabilities are ignored for purposes of both 357(c)(1) and 358. 358(d)(2). Accordingly, neither ABZ nor C recognizes any realized gain. ABZ's basis in the Newco stock will be 30 and C's basis in Newco will be 20.

 

 
 
 (e) Exception
 This section shall not apply to property acquired by a
 corporation by the exchange of its stock or securities (or the
 stock or securities of a corporation which is in control of the
 acquiring corporation) as consideration in whole or in part for the
 transfer of the property to it.
 

Sections 358(e), 362(b) Ex. 3

 
 

Assumptions: The transaction qualifies as a B reorganization - 368(a)(1)(B).

 

Treatment: P's basis in the T stock acquired is determined by reference to A's basis in that T stock, not P's basis in its stock transferred to A. 358(e), 362(b). Bceause A did not recognize gain in the exchange, P will get A's basis of 80 in the T stock. While 362(b) also provides an exception, that the subsection is not applicable if the property acquired consists of stock or securities of another party to the reorganization (which is true here), 362(b) further provides an exception to the exception where P's consideration given is at least partly P stock or securities, which is the case here.

 

 
 
 (f) Definition of nonrecognition property in case of section 361
 exchange
 For purposes of this section, the property permitted to be
 received under section 361 without the recognition of gain or loss
 shall be treated as consisting only of stock or securities in
 another corporation a party to the reorganization.
 

Sections 357(c)(1)(B) Ex. 1, 358(f), 362(b) Ex. 1

 
 
 

Assumptions: The requirements of 355 and 368(a)(1)(D) are satisfied. Transfer of Widget to Newco includes all assets and liabilities of Widget. No tax avoidance exists - all liabilities were incurred and transferred for bona fide business purposes.

 

Treatment: 357(a) provides as a general rule that P's transfer of liabilities to Newco will not be treated as the receipt of money by P. Also, while 357(c) generally does not apply to reorganizations, it does apply to divisive D reorganizations. Hence, P will recognize gain of 20 on the excess of liabilities transfrred (50) over he basis (30) of assets transferred. 357(c)(2). Because Newco received no stock or securities of P, 358 does not apply to Newco. 358(f). Instead, 362(b) applies. Accordingly, Newco's basis in the assets will be 50, P's basis increased by P's recognized gain (30 + 20).

 

 
 
 (g) Adjustments in intragroup transactions involving section 355
 In the case of a distribution to which section 355 (or so much of
 section 356 as relates to section 355) applies and which involves
 the distribution of stock from 1 member of an affiliated group (as
 defined in section 1504(a) without regard to subsection (b)
 thereof) to another member of such group, the Secretary may,
 notwithstanding any other provision of this section, provide
 adjustments to the adjusted basis of any stock which -
 (1) is in a corporation which is a member of such group, and
 (2) is held by another member of such group,
 to appropriately reflect the proper treatment of such distribution.
 

Section 358(g)

 
 
 

Adopted from Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 1997, JCS-23-97 p.147

 
 

Assumptions: S1's spinoff of S2 to P qualifies under 355.

 

Treatment: But for 358(g), P would have bases in S1 and S2 of, respectively, approximately 17 and 33. If P were to sell S2 for its value of 100, gain would be only 67 even though if S1 had sold S2 before the spinoff, S1 would have had a gain of 100. Also, the group can continue to depreciate a basis of 50 in the S1 equipment. 358(g) grants regulatory authority to provide appropriate adjustments to the basis of stock ofo ne group member held by another group member. The legislative history does not provide further guidance as to what those adjustments should be, and no regulations have yet been proposed.

 

 
 
 (h) Special rules for assumption of liabilities to which subsection
 (d) does not apply
 (1) In general
 If, after application of the other provisions of this section
 to an exchange or series of exchanges, the basis of property to
 which subsection (a)(1) applies exceeds the fair market value of
 such property, then such basis shall be reduced (but not below
 such fair market value) by the amount (determined as of the date
 of the exchange) of any liability -
 (A) which is assumed by another person as part of the
 exchange, and
 (B) with respect to which subsection (d)(1) does not apply to
 the assumption.
 

Section 358(h)(1)

 
 

Assumptions: A is cash basis taxpayer. Accordingly, A has not been allowed a deduction for the unpaid business expenses A generated and transfers to Newco. The incurrance and transfer to Newco of these liabilities is not for tax avoidance but is instead for valid business purposes.

 

Treatment: But for 358(h)(1), the transfer of the unpaid expenses to Newco would not trigger a basis reduction in A's Newco stock and A would have a basis of 1,000. These expenses are described in 357(c)(3) as liabilities the payment of which would give A a deduction. Hence, these liabilities are comprehended under 358(d)(1) and are comprehended by 358(h)(1) and therefore the Newco stock basis must be reduced (but not below FMV) by these liabilities, reducing A's basis to 400.

 
 
 (2) Exceptions
 Except as provided by the Secretary, paragraph (1) shall not
 apply to any liability if -
 (A) the trade or business with which the liability is
 associated is transferred to the person assuming the liability
 as part of the exchange, or
 

Sections 358(h)(2)(A), (3)

 
 
 

Assumptions: A is a cash basis taxpayer. Accordingly, A has not been allowed any deduction for the unpaid business expenses A generated and transferred to Newco. Both the fixed and contingent liabilities incurred by A were legitimate expenses of the business A is transferring to Newco in the transaction.

 

Treatment: A will have a basis of 1,000 in the Newco stock. While 358(d)(1) generally treats an assumption of liabilities as the receipt of money for basis purposes, this is not true for liabilities excluded under 357(c)(3), as is the case here. 358(d)(2). Furthermore, while 358(h)(1) might otherwise override the 358(d)(2) exception, 358(h)(2) overrides 358(h)(1) where the trade or business with which the liability is associated is transferred to the person assuming the liability. For purposes of 358(h), a "liability" includes both the fixed and contingent liabilities transferred by A without regard to whether the obligation is otherwise taken into account for federal tax purposes. 358(h)(3).

 

 
 
 (B) substantially all of the assets with which the liability
 is associated are transferred to the person assuming the
 liability as part of the exchange.
 

Sections 358(h)(2)(B)

 
 

Assumptions: A is a cash basis taxpayer. Accoridngly, A has not been allowed any deduction for the unpaid legal expenses A generated and transferred to Newco. These expenses were incurred defending lawsuits arising from ownership of the land which was held by A as an investment.

 

Treatment: A will have a basis of 1000 in the Newco stock. While 358(d)(1) generally treats an assumption of liabilities as the receipt of money for purposes of determining basis, this is not true for liabilities excluded under 357(c)(3), as is the case here. 358(d)(2). Furthermore, while 358(h)(1) might otherwise override the 358(d)(2) exception, the language of 358(h)(2) would theoretically provide an override to 358(h)(1) where, as here, substantially all of the assets with which the liability is associated are transferred to the person assuming the liability. 358(h)(2)(B).

 

HOWEVER, TD 9397 contains regulation 1.358-5, which specifically makes 358(h)(2)(B) not applicable and, therefore, only theoretical.

 
 
 
 (3) Liability
 For purposes of this subsection, the term ''liability'' shall
 include any fixed or contingent obligation to make payment,
 without regard to whether the obligation is otherwise taken into
 account for purposes of this title.
 

Sections 358(h)(2)(A), (3)

 
 
 

Assumptions: A is a cash basis taxpayer. Accordingly, A has not been allowed any deduction for the unpaid business expenses A generated and transferred to Newco. Both the fixed and contingent liabilities incurred by A were legitimate expenses of the business A is transferring to Newco in the transaction.

 

Treatment: A will have a basis of 1,000 in the Newco stock. While 358(d)(1) generally treats an assumption of liabilities as the receipt of money for basis purposes, this is not true for liabilities excluded under 357(c)(3), as is the case here. 358(d)(2). Furthermore, while 358(h)(1) might otherwise override the 358(d)(2) exception, 358(h)(2) overrides 358(h)(1) where the trade or business with which the liability is associated is transferred to the person assuming the liability. For purposes of 358(h), a "liability" includes both the fixed and contingent liabilities transferred by A without regard to whether the obligation is otherwise taken into account for federal tax purposes. 358(h)(3).