Discussion:Stock Basis in a Tax Free Transaction (Sec. 351)
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Discussion Forum Index --> Tax Questions --> Stock Basis in a Tax Free Transaction (Sec. 351)
Analysisinfs (talk|edits) said: | 2 August 2006 |
| Upon incorporating their business the assets and liabilities of the business entered the corporation’s book. Since the liabilities are higher than assets, how would one value the common stock in this transaction? What is the most proper way of showing the difference in the books (The excess liabilities over assets)? | |
| 2 August 2006 | |
| Be careful Analysis - sounds like it could be a code sec 357 case. If liabilities assumed by the corporation exceed the adjusted basis of the property transferred, the transferor has taxable gain, which would give him a step-up in his stock basis. Take a look at IRC 357 before going any further. | |
Analysisinfs (talk|edits) said: | 2 August 2006 |
| Thank you for your point.
However, since the transaction is for 100% of stocks of the new company then I don't believe there should be a recognized gain. Should there be one? Also, is it fair to create a receivable for the difference of liabilities over assets and that would be the initial entry in the corporation books? (assuming some arbitary number is assigned to the value of stocks) | |
| 2 August 2006 | |
| This 351 transfer is taxable under Sec. 357(c) (liabilities in excess of basis). The basis in the stock will be zero under Sec. 358(d)(1) and 358(a)(1). | |
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