The IRS code section 351 addresses property issues in a corporation. According to this section, transfer to corporation is controlled by the transferor. The transferee corporation takes a basis in the property equal to that of the transferor/shareholder, who, in turn, takes an equal basis in the stock received in exchange.

Can this transaction provide opportunities for the duplication of losses? Why or why not?

If the transferee corporation were to declare bankruptcy, would section 351 still apply? Why?

Imagine, Charles and Liz has decided to switch their 40:60 partnerships to a corporation. Charles has cash, furniture, and land, which he will transfer to the corporation. His total tax basis for these items is $70,000, and they are valued at $170,000. Liz's contributions total $80,000 tax basis and $180,000 fair market value. Liz received stock for her assets.

Would Charles recognize any gain in this transaction? Why or why not? What would be Charles's tax treatment on this transaction? Justify.

Analyze and explain how this transaction would impact Liz's basis in the stock.

Discussion Question 2

Explain how the IRS has interpreted the phrase "in control immediately after the exchange" for purposes of a section 351 exchange.