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To calculate a Section 351 exchange, first determine whether the transfer qualifies for nonrecognition, then compute realized gain, identify boot, test liabilities under Section 357, and calculate the transferor’s stock basis under Section 358. In its simplest form, recognized gain is the lesser of realized gain or boot (cash plus the fair market value of nonstock property), but liability rules can create additional gain when debt exceeds the aggregate basis of the transferred property or when the debt assumption is treated as tax-motivated.
What Section 351 does—and when it applies
Internal Revenue Code §351(a) generally defers gain or loss when one or more persons transfer property to a corporation solely for stock and those transferors are in control of the corporation immediately after the exchange. The statutory rule says: “No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.”
That nonrecognition is a deferral, not an elimination of gain. The built-in gain generally remains reflected in the stock basis and the corporation’s carryover basis in the assets. If the exchange includes cash or property other than stock, §351(b) applies and current gain can be recognized up to the amount of that nonstock consideration. The general §351 rule does not recognize a loss merely because the transferred property is worth less than its adjusted basis.
Three qualification checks
- Property is transferred. Cash, real estate, equipment, securities, intellectual property and other property can qualify. Services are not property for this purpose; issuing stock for services follows different tax rules.
- Stock is the principal consideration. A transfer can include money or other property, but those items are boot and can trigger gain under §351(b).
- Control exists immediately after the exchange. The transferor or transferor group must satisfy the control standard referenced in §368(c) immediately after the transaction. Test the ownership facts at the time of the exchange, including all relevant transferors and stock classes.
If any qualification element fails, the transaction may be taxable under rules outside §351. Do not begin the boot worksheet until the qualification facts are documented.
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Information to collect before doing the math
Build one schedule for each asset and each transferor. Use tax basis, not book basis or an appraisal value, for the basis column.
| Input | What to record | Why it matters |
|---|---|---|
| Transferred property | Description and owner | Different assets can have different basis and valuation issues. |
| Adjusted basis | Tax basis immediately before the exchange | Used to compute realized gain and the carryover component of stock basis. |
| Fair market value (FMV) | Value on the exchange date | Used to measure stock, boot property and total economic consideration. |
| Attached liabilities | Principal amount of each debt and the property securing it | Debt relief is analyzed under §357 and can also affect §358 basis. |
| Stock received | Class, number of shares and FMV if determinable | Stock is part of total consideration and remains the principal noncash consideration in a qualifying exchange. |
| Cash received | Actual cash paid to each transferor | Cash is boot under §351(b). |
| Other property received | Description and FMV of every nonstock asset | Nonstock property is boot; its FMV also generally becomes its basis. |
Keep valuation reports, debt statements, closing documents, capitalization records and the computation that ties each transferor’s schedule to the corporation’s records. The exchange date, tax year and applicable Code and regulation text control; statutory and regulatory provisions can change.
Step-by-step calculation
1. Confirm the exchange qualifies
- Identify every transferor and list the property each contributes.
- Confirm that the consideration includes stock and that any services are treated separately.
- Measure ownership immediately after the exchange under the current §368(c) control definition.
- Document any cash, nonstock property or liability relief that the transferors receive.
2. Compute aggregate adjusted basis
Add the adjusted bases of all property transferred by the relevant transferor or transferor group:
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Use each asset’s adjusted tax basis immediately before transfer, including applicable adjustments already required by the Code. Do not substitute FMV for basis.
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3. Compute total economic consideration and realized gain
Realized gain measures the economic increase before applying the recognition limits. Include the value of stock, cash, nonstock property and relevant liability relief:
Realized gain = Total consideration (stock FMV + cash + FMV of other property + relevant liability relief) − aggregate adjusted basis
For a loss, the same comparison produces a realized loss, but the general §351 rule does not recognize that loss merely because boot is present. Special provisions can change the result, so a loss scenario requires a separate review.
4. Compute boot under §351(b)
Boot is the nonstock consideration received:
Boot = Cash received + FMV of other property received
Use the value on the exchange date. Stock is not boot. A liability assumption is not automatically added to this §351(b) boot total; it receives a separate §357 analysis described below.
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5. Determine recognized gain
For a qualifying exchange that contains boot, recognized gain is generally capped at the boot amount:
Recognized gain under §351(b) = Lesser of realized gain or boot
Thus, receiving $15,000 of cash and property worth $5,000 creates $20,000 of boot. If realized gain is $12,000, the §351(b) gain is $12,000. If realized gain is $80,000, the §351(b) gain is capped at $20,000. The cap does not override a separate liability rule such as §357(c).
6. Calculate the transferor’s stock basis
Section 358 and Treasury Regulation §1.358-1 provide the controlling framework. Start with the adjusted basis of the transferred property, then apply the required reductions and increases:
Stock basis = Transferred-property basis − cash received − FMV of other property received − recognized loss − amounts treated as money under applicable liability rules + recognized gain + applicable dividend amount
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Liabilities require special care. Section 358(d) and related provisions can treat specified assumed liabilities as money received for basis purposes, while statutory exceptions and the §357(c) interaction must be applied to the facts. Do not simply subtract every debt from stock basis without checking the current Code and regulations.
Stock basis is a tax attribute. It is not automatically the stock’s FMV, the amount shown on a capitalization table or the corporation’s book value.
7. Assign basis to boot property
Other property received generally takes a basis equal to its FMV on the exchange date. Cash has a basis equal to its face amount. Record each boot asset separately so later depreciation, gain or loss calculations start with the correct amount.
Worked example with cash and property boot
The following numbers are an illustration of the mechanics, not a benchmark or tax result for any particular transaction. Assume one transferor contributes two assets:
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| Asset A | $40,000 | $100,000 |
| Asset B | $20,000 | $30,000 |
| Total | $60,000 | $130,000 |
The corporation issues stock worth $110,000, pays $10,000 cash and transfers equipment worth $10,000. No liabilities are assumed in this simplified example, and the control requirement is satisfied.
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- Realized gain: Total consideration is $130,000 ($110,000 stock + $10,000 cash + $10,000 equipment). Subtracting the $60,000 aggregate basis gives $70,000 of realized gain.
- Boot: Cash of $10,000 plus equipment FMV of $10,000 equals $20,000 of boot.
- Recognized gain: The lesser of $70,000 realized gain and $20,000 boot is $20,000.
- Stock basis: Starting with $60,000, subtract $10,000 cash and $10,000 FMV of equipment, then add $20,000 recognized gain. The resulting stock basis is $60,000, before any additional dividend or liability adjustments that could apply in a more complex transaction.
- Boot-property basis: The equipment received generally starts with a $10,000 basis, its FMV on the exchange date.
The stock’s $60,000 basis is not its $110,000 FMV. The difference reflects the statutory carryover and boot adjustments.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Does debt relief count as boot?
Debt relief is not handled by simply adding the assumed liability to the §351(b) boot line. Assumed liabilities generally do not prevent a §351 exchange from qualifying, but §§357 and 358 can produce gain and basis adjustments that are independent of ordinary cash-or-property boot.
Ordinary assumption of liabilities
When the corporation assumes or takes property subject to a liability in a bona fide business transaction, the assumption is generally analyzed under §357. It can reduce stock basis through the liability rules in §358(d), even when it does not create §351(b) boot by itself. List each liability and apply the statutory exceptions rather than using a blanket rule.
Section 357(b): tax-avoidance purpose
Section 357(b) can treat an assumed liability as money received when the principal purpose of the assumption is tax avoidance or when there is no bona fide business purpose. If treated as money, the liability can become part of the recognized-gain calculation, subject to the realized-gain limitation and the rest of the statutory rules. Document the commercial purpose, negotiations and business reason for the debt transfer.
Section 357(c): liabilities exceeding basis
Section 357(c) addresses a different problem: liabilities assumed that exceed the aggregate adjusted basis of the transferred property. The excess generally produces recognized gain. For example, if the transferred property has an aggregate adjusted basis of $50,000 and the corporation assumes liabilities of $70,000, the $20,000 excess is the amount that must be tested under §357(c). This rule can apply even when no cash or other property was received, so the §351(b) boot cap is not a substitute for the §357(c) computation.
Debt-relief worksheet
| Question | Action |
|---|---|
| What liabilities are transferred or assumed? | List principal amounts, secured property and the exact closing treatment. |
| Is there a tax-avoidance principal purpose or no bona fide business purpose? | Test §357(b) and determine whether the liability is treated as money. |
| Do liabilities exceed aggregate adjusted basis? | Compute the excess under §357(c) and include any resulting recognized gain. |
| How does debt affect stock basis? | Apply §358(d) and related exceptions after determining recognized gain. |
Stock basis versus the corporation’s asset basis
This article calculates the transferor’s stock basis and the basis of boot property received. The corporation’s basis in the contributed assets is governed primarily by §362 and is a separate computation. It should be prepared from the same asset-level basis, FMV, liability and recognized-gain schedules, but it is not interchangeable with the shareholder’s stock-basis result.
Common errors and how to correct them
- Using stock FMV as stock basis. Recalculate under §358; FMV is not the statutory starting point.
- Calling every debt assumption boot. Separate the §351(b) cash-and-property calculation from the §357(b) and §357(c) liability tests.
- Ignoring control timing. Control must exist immediately after the exchange, not at a later restructuring date.
- Including services as contributed property. Remove service compensation from the §351 property schedule and analyze it under the applicable compensation rules.
- Forgetting nonstock property. A vehicle, securities, equipment or other asset received in addition to stock is boot at FMV.
- Using book basis. Replace financial-statement carrying values with adjusted tax basis for each asset.
- Applying the boot cap to §357(c). First compute whether liabilities exceed aggregate basis; that liability rule is not erased by the §351(b) cap.
- Failing to preserve valuation and debt evidence. Keep exchange-date appraisals, payoff letters, assumption agreements and the signed computation.
A practical worksheet
- Enter each transferred asset, adjusted basis, FMV and attached liabilities.
- Sum adjusted bases and separately sum FMVs.
- Enter stock FMV, cash and each nonstock asset received.
- Compute realized gain as total economic consideration, including relevant liability relief, less aggregate basis.
- Compute §351(b) boot as cash plus FMV of nonstock property.
- Test §357(b) for tax-avoidance purpose or lack of bona fide business purpose.
- Test §357(c) by comparing liabilities with aggregate adjusted basis.
- Determine recognized gain under the applicable rule or rules.
- Compute stock basis under §358, including required liability adjustments and any applicable dividend amount.
- Assign boot property its exchange-date FMV basis and retain supporting records.
When to obtain professional review
Have a tax professional review the exchange before filing when liabilities are assumed, multiple transferors contribute property, stock classes differ, control changes around the closing, property has built-in loss, or the transaction includes services, debt refinancing or related-party arrangements. The governing transaction year matters: verify the current text of §§351, 357 and 358 and Treasury Regulation §1.358-1 for the exchange date.
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