Like many non-recognition provisions in the Code, sec. 351 doesn't excuse tax liability completely, but rather defers it until the property received in the exchange -- in this case the corporate stock -- is sold. Unless some other provision applies, such as stepped-up basis on the owner's death, the sale of the stock received is where the taxpayer will be liable for the gain that wasn't reported in the sec. 351 exchange. This preservation of gain reporting until some later time is accomplished through the basis in the stock received, which is the presumably lower basis of the property contributed rather than the fair market value of the stock received. Explain how this is done. Keep in mind there are two different basis concepts at play -- exchanged basis, which is what the shareholder has in the corporate stock received, and transferred basis, also called "carryover basis," which is what the corporation has in the property received. Now, explain how losses figure into the equation. Next, under what circumstances would you advise against a shareholder transferring to a corporation assets that would produce a loss if sold