[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: 26CFR1.358-3]

[Page 241]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.358-3  Treatment of assumption of liabilities.

    (a) For purposes of section 358, where a party to the exchange 
assumes a liability of a distributee or acquires from him property 
subject to a liability, the amount of such liability is to be treated as 
money received by the distributee upon the exchange, whether or not the 
assumption of liabilities resulted in a recognition of gain or loss to 
the taxpayer under the law applicable to the year in which the exchange 
was made.
    (b) The application of paragraph (a) of this section may be 
illustrated by the following examples:

    Example (1). A, an individual, owns property with an adjusted basis 
of $100,000 on which there is a purchase money mortgage of $25,000. On 
December 1, 1945, A organizes Corporation X to which he transfers the 
property in exchange for all the stock of Corporation X and the 
assumption by Corporation X of the mortgage. The capital stock of the 
Corporation X has a fair market value of $150,000. Under sections 351 
and 357, no gain or loss is recognized to A. The basis in A's hands of 
the stock of Corporation X is $75,000, computed as follows:

Adjusted basis of property transferred......................    $100,000
Less: Amount of money received (amount of liabilities           --25,000
 assumed)...................................................
                                                             -----------
 Basis of Corporation X stock to A..........................      75,000


    Example (2). A, an individual, owns property with an adjusted basis 
of $25,000 on which there is a mortgage of $50,000. On December 1, 1954, 
A organizes Corporation X to which he transfers the property in exchange 
for all the stock of Corporation X and the assumption by Corporation X 
of the mortgage. The stock of Corporation X has a fair market value of 
$50,000. Under sections 351 and 357, gain is recognized to A in the 
amount of $25,000. The basis in A's hands of the stock of Corporation X 
is zero, computed as follows:

Adjusted basis of property transferred......................     $25,000
Less: Amount of money received (amount of liabilities)......    --50,000
Plus: Amount of gain recognized to taxpayer.................      25,000
                                                             -----------
 Basis of Corporation X stock to A..........................           0



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