GoldCo, a U.S. corporation, incorporates its foreign branch in a § 351 exchange, creating GreenCo, a wholly owned foreign corporation. GoldCo transfers $200 in inventory (basis = $50) and $900 in land (basis = $950) to GreenCo. GreenCo uses these assets in carrying on a trade or business outside the U.S. What gain or loss, if any, does GoldCo recognize as a result of this transaction?

Question

Quizplus · Accepted Answer

In a § 351 exchange, no gain or loss is recognized by the transferor corporation (GoldCo). The transferred assets take on the same basis as they had in the hands of the transferor, so GreenCo's basis in the inventory is $50 and its basis in the land is $950. However, since the transfer was made at a loss ($250 loss on the inventory and $50 loss on the land), GoldCo must reduce the basis of its GreenCo stock by the amount of the loss recognized. Therefore, GoldCo's basis in its GreenCo stock will be reduced by $300 ($250 + $50) to reflect the loss on the transferred assets.