Sec. 362. Basis to corporations
 
(a) Property acquired by issuance of stock or as paid-in surplus
 If property was acquired on or after June 22, 1954, by a
 corporation -
 (1) in connection with a transaction to which section 351
 (relating to transfer of property to corporation controlled by
 transferor) applies, or
 (2) as paid-in surplus or as a contribution to capital,
 then the basis shall be the same as it would be in the hands of the
 transferor, increased in the amount of gain recognized to the
 transferor on such transfer.
 
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.

 

 

 

Section 362(a)(2)

 

 

Treatment: A and B recognize no gain or loss from the contributions of the land and cash to X. Their bases in their X stock increases by the basis of assets contributed to 155 and 165, respectively. X has a basis in the land of 40, equal to A's 40 basis plus 0 gain recognized by A on the transfer. 362(a)(2).

 

 

 

 (b) Transfers to corporations
 If property was acquired by a corporation in connection with a
 reorganization to which this part applies, then the basis shall be
 the same as it would be in the hands of the transferor, increased
 in the amount of gain recognized to the transferor on such
 transfer. This subsection shall not apply if the property acquired
 consists of stock or securities in a corporation a party to the
 reorganization, unless acquired by the exchange of stock or
 securities of the transferee (or of a corporation which is in
 control of the transferee) as the consideration in whole or in part
 for the transfer.
 

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 transferred (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).

 

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 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). Because 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.

 

 

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 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).

 

 

 
 
 (c) Special rule for certain contributions to capital
 (1) Property other than money
 Notwithstanding subsection (a)(2), if property other than money
 -
 (A) is acquired by a corporation, on or after June 22, 1954,
 as a contribution to capital, and
 (B) is not contributed by a shareholder as such,
 then the basis of such property shall be zero.
 

Section 362(c)(1)

 
 

Assumptions: New City transfers the factory as an incentive to bring manufacturing operations by X to New City and it meets the requirements to be considered a contribution to capital.

 

Treatment: X does not recognize gain from New City's contribution. 118(a). X will have a basis of 0 in that factory. 362(c)(1).

 

 
 
 (2) Money
 Notwithstanding subsection (a)(2), if money -
 (A) is received by a corporation, on or after June 22, 1954,
 as a contribution to capital, and
 (B) is not contributed by a shareholder as such,
 then the basis of any property acquired with such money during
 the 12-month period beginning on the day the contribution is
 received shall be reduced by the amount of such contribution.
 The excess (if any) of the amount of such contribution over the
 amount of the reduction under the preceding sentence shall be
 applied to the reduction (as of the last day of the period
 specified in the preceding sentence) of the basis of any other
 property held by the taxpayer. The particular properties to
 which the reductions required by this paragraph shall be
 allocated shall be determined under regulations prescribed by the
 Secretary.
 

Section 362(c)(2) Ex. 1

 
 

Assumptions: New City made the grant of $20 to X as an incentive to have X stay in New City and the grant meets the requirements to be considered a contribution to capital. X used the funds to upgrade its trucking fleet operating out of New City, all done within 12 months of the grant.

 

Treatment: X does not recognize gain from New City's contribution. 118(a). X does not take a basis 0 in the cash. Instead, X reduces its basis in the trucks from 30 to 10. 362(c)(2).

 

Section 362(c)(2) Ex. 2

 
 
 
 

Assumptions: New City made the grant of $45 to X as an incentive to have X stay in New City and the grant meets the requirements to be considered a contribution to capital. X uses some of the funds to upgrade its tracking fleet operating out of New City, and the remainder for operating expenses, all done within 12 months of the grant.

 

Treatment: X does not recognize gain from New City's contribution. Instead, X first reduces its basis in the trucks to 0 and then reduces its basis in its pre-existing asset, the factory, from 40 to 25. 362(c)(2).

 

 
 
 (d) Limitation on basis increase attributable to assumption of
 liability
 (1) In general
 In no event shall the basis of any property be increased under
 subsection (a) or (b) above the fair market value of such
 property (determined without regard to section 7701(g)) by reason
 of any gain recognized to the transferor as a result of the
 assumption of a liability.
 

Section 362(d)(1)

 

 

Assumptions: The mortgage is at a rate well below market rate. The incurrance and transfer of the mortgage was for bona fide business purposes and not tax avoidance.

 

Treatment: A recognizes a gain of 25, the excess of liabilities transferred over the basis of assets transferred. 357(c). Under the general rule of 362(a), Newco would have a basis of 65 in the land, consisting of A's basis of 40 increased by A's recognized gain of 25. Under 362(d)(1), however, the basis increase for A's recognized gain cannot increase the corporation's basis in the property above FMV. Accordingly, Newco will have a basis of 55 in the land.

 

 
 
 (2) Treatment of gain not subject to tax
 Except as provided in regulations, if -
 (A) gain is recognized to the transferor as a result of an
 assumption of a nonrecourse liability by a transferee which is
 also secured by assets not transferred to such transferee; and
 (B) no person is subject to tax under this title on such
 gain,
 then, for purposes of determining basis under subsections (a) and
 (b), the amount of gain recognized by the transferor as a result
 of the assumption of the liability shall be determined as if the
 liability assumed by the transferee equaled such transferee's
 ratable portion of such liability determined on the basis of the
 relative fair market values (determined without regard to section
 7701(g)) of all of the assets subject to such liability.
 
 

Section 362(d)(2)

 
 
 

Assumptions: Neither B nor Foreign Corp. are subject to U.S. taxation, but Newco is. The land parcels owned by Foreign and B are subject to the same nonrecourse mortgage of 120. Foreign agrees to pay 110 of this, while B agrees to pay 10.

 

Treatment: Foreign is deemed to have transferred a liability of 110, the mortgage of 120 reduced by 10, the lesser os B's FMV of 60 in B's parcels or the 10 that B agrees to pay. 357(e)(1). Foreign would therefore have a gain of 60, but it is not subject to U.S. tax. Under 362(a), Newco would normally have a basis of 110 in the parcels transferred, Foreign's AB of 50 increased by Foreign's gain of 60. 362(d)(2) changes that result. For Newco's basis purposes, Foreign is deemed to have transferred only those liabilities proportionate to the value of assets transferred: 120/180 x 120 = 80. Gain for this purpose would hypothetically equal 30 and, accordingly, Newco would have a basis of 80 in the parcels transferred.

 

 
 (e) Limitations on Built-In Losses.--
 (1) Limitation on importation of built-in losses.--
 (A) In general.--If in any transaction described 
in subsection (a) or (b) there would (but for this 
subsection) be an importation of a net built-in loss, 
the basis of each property described in subparagraph (B) 
which is acquired in such transaction shall 
(notwithstanding subsections (a) and (b)) be its fair 
market value immediately after such transaction.
 (B) Property described.--For purposes of 
subparagraph (A), property is described in this 
subparagraph if--
 (i) gain or loss with respect to such 
property is not subject to tax under this subtitle 
in the hands of the transferor immediately before 
the transfer, and
 (ii) gain or loss with respect to such 
property is subject to such tax in the hands of 
the transferee immediately after such transfer.
 In any case in which the transferor is a partnership, 
the preceding sentence shall be applied by treating each 
partner in such partnership as holding such partner's 
proportionate share of the property of such partnership.
 (C) Importation of net built-in loss.--For 
purposes of subparagraph (A), there is an importation of 
a net built-in loss in a transaction if the transferee's 
aggregate adjusted bases of property described in 
subparagraph (B) which is transferred in such 
transaction would (but for this paragraph) exceed the 
fair market value of such property immediately after 
such transaction.
 

Section 362(e)(1) Ex. 1

 
 

Assumptions: Foreign Corp. would not be subject to U.S. taxation on the assets transferred had it sold those assets. A would have been subject to U.S. taxation if A had sold those assets. Newco will be subject to U.S. taxation if it sells those assets.

 

Treatment: There is an importation of net built-in loss because Newco's aggregate AB in the assets transferred by Foreign Corp. would have been 70, which exceeds their FMV of 60. Newco's basis in the assets transferred by Foreign will be their FMV: asset 1, 25, asset 2, 35. 362(e)(1). Newco's basis in the assets transferred by A are determined by the general rule of 362(a) and will equal 40.

 

 

Section 362(e)(1) Ex. 2

 

 

Assumptions: Foreign Corp. is not subject to U.S. taxation. FX is a domestic partnership. X is subject to U.S. taxation.

 

Treatment: There is an importation of net built-in loss. Where a partnership transfers property in a 362 transaction, a proportionate part of each asset transferred is treated as transferred by each partner. 362(e)(1). Foreign, the only person that would not be subject to U.S. tax on gain from the assets, is deemed to have transferred 40% of the assets transferred by FX. Accordingly, that proportion of assets have an AB of 12 and FMV of 16. Overall, Foreign is deemed to have transferred assets with an AB of 62 and FMV of 56. Newco will have a basis in the assets deemed transferred by X determined under normal 362(a) rules. Newco's AB in the assets transferred by FX will therefore be 34: 16 in that part of those assets deemed transferred by Foreign, and 18 in the assets deemed transferred by X. Newco will have a basis of 40 (equal to their FMV) in the assets directly transferred by Foreign.

 

 

Sections 362(e)(1) Ex. 3, 362(e)(2) Ex. 2

 

 
 

Assumptions: Foreign1 and Foreign2 would not be subject to U.S. taxation on the assets transferred had they sold those assets. A would be subject to U.S. taxation if A had sold the assets transferred. Newco will be subject to U.S. taxation if it sells those assets.

 

Treatment: There is no importation of net built-in loss because Newco's aggregate AB in the assets transferred by Foreign1 and Foreign2 would have been 70 which does not exceed the 70 FMV in those assets. 362(e)(1)(C). Accordingly, 362(a) will determine Newco's AB in the assets from Foreign2 and A: 30 in the asset transferred by Foreign2 and 40 in the asset from A. 362(e)(2) will apply to the asset acquired from Foreign1 and, accordingly, Newco will have a basis of 35 in this asset.

 

 
 
 
 (2) Limitation on transfer of built-in losses in section 
351 transactions.--
 (A) In general.--If--
 (i) property is transferred by a transferor 
in any transaction which is described in 
subsection (a) and which is not described in 
paragraph (1) of this subsection, and
 (ii) the transferee's aggregate adjusted 
bases of such property so transferred would (but 
for this paragraph) exceed the fair market value 
of such property immediately after such 
transaction,
 then, notwithstanding subsection (a), the transferee's 
aggregate adjusted bases of the property so transferred 
shall not exceed the fair market value of such property 
immediately after such transaction.
 (B) Allocation of basis reduction.--The aggregate 
reduction in basis by reason of subparagraph (A) shall 
be allocated among the property so transferred in 
proportion to their respective built-in losses 
immediately before the transaction.
 (C) Election to apply limitation to transferor's 
stock basis.--
 (i) In general.--If the transferor and 
transferee of a transaction described in 
subparagraph (A) both elect the application of 
this subparagraph--
 (I) subparagraph (A) shall not 
apply, and
 (II) the transferor's basis in the 
stock received for property to which 
subparagraph (A) does not apply by 
reason of the election shall not exceed 
its fair market value immediately after 
the transfer.
 (ii) Election.--Any election under clause 
(i) shall be made at such time and in such form 
and manner as the Secretary may prescribe, and, 
once made, shall be irrevocable.
 
 

362(e)(2) Ex. 1

 

 

Assumptions: All persons are subject to U.S. taxation.

 

Treatment: No shareholders recognize gain from their exchanges. 351(a). 362(e)(2) changes the 362(a) general rule for Newco's AB in the assets received from A and C, but not B, because A and C, but not B, transfer assets with aggregate built-in losses. Newco will have an AB of 30 in asset 1. 362(e)(2)(A). Newco will have an AB of 45 in asset 2. 362(a). Pursuant to 362(e)(2)(A), Newco will have aggregate bases of 97 in assets 3, 4 and 5, 8 less than would be the result under the 362(a) general rule. This 8 reduction is allocated to assets 3 and 5 proportionate to the relative built-in losses in those assets (15 and 5): 6 to asset 3, 2 to asset 5. 362(e)(2)(B). Accordingly, Newco will have bases in assets 3, 4 and 5 of 29, 50 and 18, respectively.

 

 
 

Sections 362(e)(1) Ex. 3, 362(e)(2) Ex. 2

 

 
 

Assumptions: Foreign1 and Foreign2 would not be subject to U.S. taxation on the assets transferred had they sold those assets. A would be subject to U.S. taxation if A had sold the assets transferred. Newco will be subject to U.S. taxation if it sells those assets.

 

Treatment: There is no importation of net built-in loss because Newco's aggregate AB in the assets transferred by Foreign1 and Foreign2 would have been 70 which does not exceed the 70 FMV in those assets. 362(e)(1)(C). Accordingly, 362(a) will determine Newco's AB in the assets from Foreign2 and A: 30 in the asset transferred by Foreign2 and 40 in the asset from A. 362(e)(2) will apply to the asset acquired from Foreign1 and, accordingly, Newco will have a basis of 35 in this asset.

 

 

362(e)(2)(C)

 

 

 

 

Assumptions: Newco and C (but not A) make an election under 362(e)(2)(C). All persons are subject to U.S. taxation.

 

Treatment: Pursuant to 362(a), (e)(2)(A) & (B), Newco would have had bases in assets 1, 2, 3, 4 and 5 of 30, 45, 29, 50 and 18, respectively. A, B and C would have had bases in their Newco stock of 40, 45 and 105, respectively. 358. The 362(e)(2)(C) election changes Newco's bases for asset 3 and asset 5 and for C's basis in the Newco stock. Newco will get a normal 362(a) basis of 35 and 20 in assets 3 and 5, while C will get a basis of 97 in the Newco stock.