How to Calculate Corporation's Basis per Section 351 with a Built-in Loss (U.S. Corporate Tax)

This video explains how to calculate the transferee corporation's basis in assets received in a Section 351 transaction when the built-in loss limitation applies. The corporation's basis is determined by taking the basis of the asset in the transferor's hands, adding any gain recognized by the transferor, and subtracting the asset's share of any built-in loss limitation. The built-in loss limitation applies when the aggregate adjusted basis of all properties transferred exceeds their aggregate fair market value. The difference is the amount of the built-in loss limitation, which is allocated to each asset with a built-in loss based on the asset's relative share of all built-in losses.

It is important to note that built-in gains offset built-in losses. Also, if the transferor and transferee agree, the corporation can avoid the built-in loss reduction by instead reducing the transferor's basis in the stock received.

The built-in loss limitation is intended to prevent the doubling up of losses and is found in Section 362(e) of the U.S. tax code.—
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