Transfer of encumbered property to corporation can have negative tax consequences.

• Jurisdiction: United States
• Author: Hudson, Boyd D.
• Date: 01 May 1997

When a person transfers property to a corporation in return for the corporation's stock in a transaction qualifying under Sec. 351, he normally takes a basis in the stock equal to the basis in the property transferred, plus or minus certain adjustments. Sec. 358(a)(1) provides that the stock basis will be (A) decreased by (i) the fair market value of any property received by the taxpayer, (ii) the amount of any money received and (iii) the amount of loss recognized on the exchange, and (B) increased by (i) amounts treated as a dividend and (ii) any gain recognized by the taxpayer. (In a typical incorporation transaction, there can be no dividend.) If, as part of the transaction, the...