Final Regulations Address Limits on Transfer of Built‐in Losses

Published date01 October 2016
AuthorShirley Dennis‐Escoffier
DOIhttp://doi.org/10.1002/jcaf.22198
Date01 October 2016
107
© 2016 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22198
D
e
p
a
r
t
m
e
n
t
s
IRS
Final Regulations Address Limits on
Transfer of Built-in Losses
Shirley Dennis-Escoffier
The Internal Revenue Service
(IRS) issued final regulations
providing guidance on the
determination of basis in non-
recognition transactions involv-
ing built-in losses. This involves
tax-free transfers of property,
such as incorporating a busi-
ness or transfers to existing
corporations. The purpose of
these rules is to prevent taxpay-
ers from generating multiple
tax losses from one economic
loss and to prevent importa-
tion of losses from entities
not subject to U.S. taxation.
These rules function through
an adjustment to tax basis
effectively preventing a corpo-
ration from benefiting from
the built-in losses. The IRS
recently issued final regulations
that clarify the treatment of
these transactions and provide
numerous examples.
BACKGROUND
The transfer of property to
a corporation in exchange for
stock is usually not currently
taxable if it meets both of
the following requirements of
Internal Revenue Code (IRC)
Section 351:
1. The shareholders transfer
qualied property to the
corporation in exchange
for the corporation’s stock.
Qualied property includes
almost any type of asset
other than services.
2. Immediately after the
exchange, the shareholders
transferring property are
in control of the corpora-
tion. Control is generally
dened as owning at least
80% of the stock entitled to
vote and at least 80% of the
total number of shares of all
other classes of stock of the
corporation.
Assuming these require-
ments are met, the shareholder
does not recognize gain or
loss as long as the shareholder
receives only corporate stock.
The shareholder’s basis in the
stock acquired equals the tax
basis in the property trans-
ferred. The corporation does
not recognize any gain or loss
and will use a carryover tax
basis equal to the shareholder’s
tax basis in the property imme-
diately prior to the transfer.
When property with a built-in
gain is transferred, IRC Section
351 shields the shareholder
from recognizing current gain,
postponing gain recognition
until the shareholder subse-
quently disposes of the stock in
a taxable transaction.
Example 1: Ed trans-
fers property with a
tax basis of $100,000
and a fair market
value of $130,000 to
Alpha Corporation in
exchange for all of its
stock. Neither Ed nor
Alpha recognizes any
gain at the time of the
transfer. Ed’s basis for
the Alpha stock will be
$100,000 and Alpha’s
basis for the property
will be $100,000. If Ed
later sells his Alpha
stock for $130,000, he
will recognize a capital
gain on the date of sale
of $30,000. If Alpha
Corporation sells the
property for $130,000,
it would recognize a
$30,000 gain on the
date of sale.
Prior to 2004, many tax-
payers took advantage of the

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT