Question

How does the transfer of mortgaged property to a controlled corporation affect the transferor-shareholder's basis in stock received? Assume that no gain is recognized on the transfer.

Answer 1

Pursuant to § 357(a), the transfer of mortgaged property to a controlled corporation does not trigger gain. The transfer does not result in boot to the transferor shareholder. However, there are two exceptions to the rule of § 357(a). Section 357(b) provides that if the principal purpose of the assumption of the liabilities is to avoid tax orif there is not a bona fide business purpose behind the exchange, the liabilities are treated as boot. Further, § 357(c) provides that if the sum of the liabilities assumed exceeds the adjusted basis of the properties transferred, the excess is taxable gain.