[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.357-2]

[Page 238-239]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.357-2  Liabilities in excess of basis.

    (a) Section 357(c) provides in general that in an exchange to which 
section 351 (relating to a transfer to a corporation controlled by the 
transferor) is applicable, or to which section 361 (relating to the 
nonrecognition of gain or loss to corporations) is applicable by reason 
of a section 368(a)(1)(D) reorganization, if the sum of the amount of 
liabilities assumed plus the amount of liabilities to which the property 
is subject exceeds the total of the adjusted basis of the property 
transferred pursuant to such exchange, then such excess shall be 
considered as a gain from the sale or exchange of a capital asset or of 
property which is not a capital asset as the case may be. Thus, if an 
individual transfers, under section 351, properties having a total basis 
in his hands of $20,000, one of which has a basis of $10,000 but is 
subject to a mortgage of $30,000, to a corporation controlled by him, 
such individual will be subject to tax with respect to $10,000, the 
excess of the amount of the liability over the total adjusted basis of 
all the properties in his hands. The same result will follow whether or 
not the liability is assumed by the transferee. The determination of 
whether a gain resulting from the transfer of capital assets is long-
term or short-term capital gain shall be made by reference to the 
holding period to the transferor of the assets transferred. An exception 
to the general rule of section 357(c) is made (1) for any exchange as to 
which under section 357(b) (relating to assumption of liabilities for 
tax-avoidance purposes) the entire amount of the liabilities is treated 
as money received and (2) for an exchange to which section 371 (relating 
to reorganizations in certain receivership and bankruptcy proceedings) 
or section 374 (relating to gain or loss not recognized in certain 
railroad reorganizations) is applicable.
    (b) The application of paragraph (a) of this section may be 
illustrated by the following examples:
    Example (1). If all such assets transferred are capital assets and 
if half the assets (ascertained by reference to their fair market value 
at the time of the transfer) have been held for less than 1 year (6 
months for taxable years beginning before 1977; 9 months for taxable 
years beginning in 1977), and the remaining half for more than 1 year (6 
months for taxable years beginning before 1977; 9 months for taxable 
years beginning in 1977), half the excess of the amount of the liability 
over the total of the adjusted basis of the property transferred 
pursuant to the exchange shall be treated as short-term capital

[[Page 239]]

gain, and the remaining half shall be treated as long-term capital gain.
    Example (2). If half of the assets (ascertained by reference to 
their fair market value at the time of the transfer) transferred are 
capital assets and half are assets other than capital assets, then half 
of the excess of the amount of the liability over the total of the 
adjusted basis of the property transferred pursuant to the exchange 
shall be treated as capital gain, and the remaining half shall be 
treated as gain from the sale or exchange of assets other than capital 
assets.

[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6528, 26 FR 
399, Jan. 19, 1961; T.D. 7728, 45 FR 72650, Nov. 3, 1980]