A taxpayer transfers assets and liabilities to a corporation in return for its stock. If the liabilities exceed the basis of the assets transferred, the taxpayer will recognize gain to avoid having a negative basis in the stock.

Question

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According to the Internal Revenue Code Section 357(c), if the liabilities assumed by a corporation exceed the adjusted basis of the assets transferred by the taxpayer, the difference is treated as gain that must be recognized by the taxpayer. This is to prevent the taxpayer from having a negative basis in the stock received from the corporation.

A Taxpayer Transfers Assets and Liabilities to a Corporation in Return