What is Liabilities in a section 351 transfer?
In short
When a corporation takes over a shareholder's liabilities in a tax-free section 351 transfer, the liabilities generally aren't treated as boot. Two exceptions can make the shareholder recognize gain.
Key takeaways
- If the main purpose of the transfer is tax avoidance or isn't a business purpose, all the liabilities are treated as boot.
- If the liabilities assumed exceed the shareholder's total basis in the property transferred, the excess is gain.
- The liabilities reduce the shareholder's basis in the stock received.
Example
Property with a basis of $50,000 subject to a $70,000 mortgage: the shareholder recognizes $20,000 of gain and has a zero stock basis.
Where it's tested
REG: C Corporation Taxation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A corporation owns 30% of the stock of another domestic corporation and receives a $100,000 dividend. Ignoring the taxable income limitation, what is the dividends-received deduction?