During the year, Proprietor incorporated his hobby shop in a transaction that generally qualifies for nonrecognition under § 351.As part of the formation, he transferred various liabilities to the new corporation, including a bill for a recent shipment of Prestochangos, the hottest toy on the market.When the corporation later paid the bill, it properly charged the items to its inventory account.In determining the tax consequences of exchange, the liability is ignored for determining Proprietor's gain recognized.

Question

Quizplus · Accepted Answer

Under § 351, while the transfer of property to a corporation in exchange for its stock can allow for nonrecognition of gain or loss, the assumption of liabilities by the corporation can trigger gain recognition to the extent that the liabilities assumed exceed the basis of the assets transferred. The liability is not ignored; it is considered in determining the gain recognized by the proprietor.

During the Year, Proprietor Incorporated His Hobby Shop in a Transaction