iTechGuides is reader-supported. When you buy through links on our site, we may earn an affiliate commission. As an Amazon Associate I earn from qualifying purchases. Learn more
A corporation’s assumption of a transferor’s debt is generally not treated as cash or other property in a qualifying Section 351 exchange. It can nevertheless trigger gain when the assumption is tax-motivated or lacks a bona fide business purpose, when assumed liabilities exceed the adjusted basis of the transferred property, or when a reorganization’s consideration and continuity tests count the liabilities. The same debt can therefore be ignored for one gain-recognition rule while reducing the transferor’s stock basis or jeopardizing reorganization qualification.
The governing framework
Section 351 generally provides that no gain or loss is recognized when property is transferred to a corporation solely in exchange for its stock, provided the transferors are in control of the corporation immediately after the exchange. The statutory text is available at 26 U.S.C. §351.
Debt enters the analysis when the corporation agrees to pay an obligation of the transferor or receives property already subject to a lien or other liability. Section 357 addresses whether that liability is treated as money or other property for gain purposes. Section 358 then addresses the transferor’s basis in the stock received. A reorganization under Section 368 can add a separate consideration or continuity limitation.
What is a liability assumption?
For this purpose, a liability assumption includes two related situations:
#1 Best Overall
- Powerful Turbo Fan:CAGIWIRU Electric Air Duster have reached speed up to 130000RPM,Can efficient remove dust and debris.With LED light and Three Adjustable Speed to meet with different cleaning tasks.
- With Attached USB C Fasting Charging cable.Charing 3 hours,Enjoy up to 240 minutes of use on the lowest setting, For third speed can use for 25mins.with four charging options to meet with your needs.
- Wide Application: attached 5 different nozzles,making it suitable for a variety of scenes, such as car,pet, pc, keyboards, and other electronic devices. It also serves for office and home clean duster.
- Handy Design & Portable:Cordless air duster electric nozzle is Light weight and small size, design and comfortable to hold and space saving, convenient to carry around. You can put it in your room or inside the car without taking up space.
- Economical &Reusable: Built durable materials with a long-lasting battery,our CAGIWIRU air duster it's a sustainable alternative to disposable air cans.
- The corporation expressly agrees to assume and pay a transferor liability, such as a note or mortgage.
- The corporation receives property that remains subject to a liability, so the property is transferred with the debt attached to it.
Section 357(c) measures both categories together: liabilities assumed by the corporation plus liabilities to which the transferred property is subject. The relevant comparison is with the total adjusted basis of the property transferred, as described in Treasury Regulation §1.357-2.
“Boot” is a useful shorthand for cash or other property received in a nonrecognition exchange, but the statute does not automatically classify every assumed liability as boot. The first question is whether Section 357(a), (b), or (c) applies; a second question is whether another rule, such as a reorganization continuity test, counts the liability in the consideration mix.
Default treatment: Section 357(a)
Under Section 357(a), an assumed liability is generally not treated as money or other property when the exchange would otherwise qualify under Section 351 or Section 361. The rule is stated in 26 U.S.C. §357 and repeated in Treasury Regulation §1.357-1.
Windows Errors? Fix Them Before They Spread
Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallCrashes, No Sound, or Screen Glitches?
Random freezes, missing sound and display glitches usually trace back to one bad driver. Find and replace yours safely.Free scan · under a minuteThe regulation’s example uses property with a $10,000 adjusted basis, $3,000 of cash received, and a $4,000 liability assumed by the corporation. Assuming the exchange qualifies under Section 351, the recognized gain is limited to the $3,000 cash. The $4,000 assumption is not treated as “other property” under the general rule of Section 357(a).
Thus, a mortgage assumed by the corporation does not automatically create taxable boot in an otherwise qualifying Section 351 contribution. The transferor must still test the exceptions below and calculate the separate stock-basis effect under Section 358.
Rank #2
- Screen Cleaner is Your Screen’s New Bestfriend! - EVEO is proud to present a screen cleaner that’s perfectly suited for your TV. Meet your new screen cleaner, computer screen cleaner, laptop cleaner, iPad cleaner, Macbook,tv cleaner or any other electronic device. Our screen cleaner spray and wipe along with the included plush microfiber cloth, easily removes dust, fingerprints & other smudges on the screen’s surface. Clean effectively for a streak-free screen
- Gentle on your Screens - Our screen cleaner spray and wipes is compatible to be used even for the most sensitive LCD, LED, CRT, and OLED screens in proper use. Be at ease knowing that this product is compatible with all the major brands: LG, SONY, Samsung, Sharp, iPad, iPhone, Android screens, Kindle, PC monitors - we’ve got you covered! Can be used as LCD screen cleaner, tv cleaner, smart tv screen cleaner, and more
- Premium Super Soft Plush Microfiber Cloth - Included in this efficient screen cleaning kit. This screen cleaner spray and wipe has our signature plush microfiber cloth specially designed to comply with screens and monitors and leave them streak-free. Has been shown to effectively absorbs stubborn stains, zero streaks, and no fiber shedding. Always use this together with our screen cleaner for the best results
- Easy-to-Use Screen Cleaner Kit + microfiber cleaning cloth - The EVEO Screen Cleaning Kit will easily be your new favorite tool when it comes to taking care of the things you love most, quick and easy solution for a streak-free screen. Simply screw on the sprayer gun on the screen cleaner bottle. Spray the cleaning liquid onto the microfiber cloth, then wipe the screen until desired cleanliness & shine is achieved.
- Quality Screen Care Kit Worth Purchasing - Enjoy a convenient Screen Cleaner anytime, anywhere you need it. Your satisfaction is our top priority. We stand behind the quality of our products and that’s why, you shouldn’t be worrying at all. We manufacture the Best Screen Cleaner. and can be used for laptop cleaning kit, laptop screen cleaner, tv screen cleaner for smart tv. MacBook screen cleaner, monitor cleaner or screen cleaner spray for electronic devices with microfiber cleaning cloth
Exception for tax avoidance or no business purpose: Section 357(b)
Section 357(b) overrides the normal treatment when the principal purpose of the assumption is to avoid federal income tax or when there is no bona fide business purpose for the assumption. In that case, the liability is treated as money received.
The statute places the proof burden on the taxpayer and requires the taxpayer to establish the relevant facts by a clear preponderance of the evidence. The text appears in 26 U.S.C. §357.
How to analyze the exception
- Identify the commercial reason the corporation is taking the debt, such as moving an operating business and its financing together.
- Document the transaction’s business purpose contemporaneously rather than relying on a later explanation.
- Separate ordinary financing or operational reasons from any tax-driven reason for placing the liability in the corporation.
- Recognize that a transaction can fail this test even when the debt is commercially real; the issue is the purpose of the assumption.
If Section 357(b) applies, the liability is treated as money received for gain-recognition purposes. That result is different from the normal Section 357(a) rule and can create recognized gain even when the liabilities do not exceed basis.
Liabilities exceeding basis: Section 357(c)
Section 357(c) generally requires gain recognition when the total liabilities assumed, plus liabilities attached to the transferred property, exceed the total adjusted basis of the property transferred. The excess is the recognized amount under Treasury Regulation §1.357-2, subject to statutory exceptions.
The calculation is an aggregate test, not a debt-by-debt test:
Rank #3
- 【Large size】：Measuring 800 x 300 mm/ 31. 5×12 inches, which is wider and taller than others. Large mouse pad can perfectly fit your keyboard and mouse of any size, and there is also ample space for peripherals such as phones, tablets, etc.
- 【LED backlight mouse pad】：Blade Hawks RGB mouse pad provides 7 static modes and 7 dynamic modes will give you the options you are looking for. Power-off memory function remembers the last lighting mode you selected. The super glow fiber Chroma will give you a colorful gaming setup that you want.
- 【Anti-slip rubber base】：Made from Natural rubber, this gaming mousepad will firmly grip your desktop, allowing you to enjoy the ultimate precision in the games you are most passionate about. It also comes with a texture that enhances this ability even further.
- 【Smooth and waterproof surface】: Micro-textured cloth surface, for extremely precise mouse control and a smooth movement. When liquid splashes on the gaming mouse pad, it forms water droplets and slides down. Will not delay your work or gameplay.
- 【Plug and play】: This mouse and keyboard pad is powered by USB, plug and play, no driver required. One button control light modes. Press one time to change the lighting mode, press twice to change the brightness, press and hold about 3 seconds turn ON/OFF.
| Calculation item | What to include |
|---|---|
| Liabilities assumed | Debt the corporation agrees to pay for the transferor |
| Liabilities attached to property | Debt that remains secured by or otherwise burdens property received by the corporation |
| Comparison amount | Total adjusted basis of all property transferred in the transaction |
| Potential recognized gain | The excess of the first two items over the adjusted-basis total |
For example, if transferred property has a combined adjusted basis of $40,000 and the corporation assumes or takes property subject to $55,000 of liabilities, the excess is $15,000. That $15,000 is the amount the Section 357(c) rule generally brings into gain, assuming no applicable statutory exception.
The Tool Desk
Outbyte PC Repair FREERepair Windows errors before they cause bigger problemsFix Now →Outbyte Driver Updater FREEFix the driver behind crashes, sound loss and screen glitchesFind Drivers →Basis must be measured using the adjusted tax basis of the property transferred, not its fair market value or the amount of debt alone. A high-value asset can still produce Section 357(c) gain if its tax basis is low.
Special Section 361 transfers
Section 357(c) expressly applies its excess-liability rule to certain transfers made under Section 361 as part of a Section 368(a)(1)(D) plan, including divisive-reorganization contexts. The same excess-over-basis concern therefore can arise in a corporate reorganization even though the transfer is not a straightforward Section 351 incorporation.
Stock basis: why an ignored liability still matters
Section 357(a) determines whether the liability is treated as money or other property for gain recognition. Section 358 uses a different rule for the transferor’s basis in the stock received: an assumed liability is treated as money received, so it generally reduces the stock basis, with recognized gain and other statutory adjustments applied afterward. See 26 U.S.C. §358.
This creates an important two-track result. A $4,000 mortgage assumption might not be current boot under Section 357(a), yet it can still reduce the transferor’s basis in the corporation’s stock by $4,000 before the other Section 358 adjustments are applied. The stock-basis calculation must therefore be performed even when the liability produces no immediate gain under the default rule.
Quick wins for a faster PC:
Scan for outdated or missing drivers - takes under a minuteDriver Scan →Clear out junk files and repair common Windows errorsFree Scan →Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Rank #4
- 【Softer and More Comfortable】Vaydeer wrist rest has unique diamond pattern, which is the combination of softness and aesthetics. The materials of wrist rest are improved into higher quality memory foam and covered with silky smooth lycra. The computer wrist rest makes you as comfortable and cushiony as like rest your wrists on clouds.
- 【Ergonomic Wrist Saver】The wrist rests for keyboard and mouse comes with a 17.32×3.15×0.83 inch keyboard wrist pad and a 5.94×3.15×0.83 inch mouse wrist support. Based on ergonomic design, the unique concave shape is the perfect fit for your wrist joints. The wrist rest pad fits most computer keyboards and laptops, improve hand and wrist posture, release your wrist and arm stress.
- 【Non-Slip Rubber Bottom】Featuring an anti-skid silicone base on the bottom, this wrist keyboard support stays firmly in place on your desk, preventing the padding from sliding around, ensuring stable and consistent wrist support during extended computer sessions.
- 【Better Experience & Pain Relief】Our keyboard arm rest is beneficial to alleviate the soreness caused by direct contact and friction between your arm and a hard desk surface, reducing the risk of wrist fatigue or carpal tunnel. The soft texture of memory foam can evenly distribute the pressure around your wrists and provide good support with just enough give.
- 【Helpful in Multiple Scenarios】Whether you're working, studying, writing, typing, gaming, this keyboard and mouse rest combo is an essential accessory to add comfort and support to your hands and wrists. It’s also a great gift for men, women, family, friend, coworker, gamer, teacher, etc.
- Gain-recognition track: Test Section 357(a), (b), and (c).
- Stock-basis track: Treat the assumed liability as money received for the Section 358 basis computation.
- Reorganization track: If the transaction is part of a reorganization, test whether the liability counts as consideration under the applicable continuity or voting-stock rule.
Reorganization transfers: liability assumptions can count as consideration
A reorganization can satisfy the nonrecognition rules and still fail a separate qualification limit if too much consideration is something other than the required stock. In specified reorganizations, assumed liabilities are included with cash and other consideration when applying continuity or solely-for-voting-stock limitations.
Treasury Regulation §1.368-2 gives an example in which $70 of cash plus a $10 liability assumption exceeds a 20 percent limitation measured against the target property’s value. The example demonstrates the key point: an assumption that is not treated as boot under Section 357(a) can nevertheless count in a reorganization’s consideration mix.
Questions to ask in a reorganization
- What type of Section 368 reorganization is being attempted?
- Does the applicable rule require consideration to be solely voting stock or impose a percentage limit on cash and other property?
- Are the assumed liabilities included with cash for that calculation?
- Does the transfer qualify as a Section 361 transfer under the reorganization plan?
- Could the liability amount push non-stock consideration over the permitted threshold?
Do not stop the analysis after concluding that Section 357(a) applies. Reorganization qualification is a separate layer of testing, and the liability may be relevant there even though it is excluded from immediate boot treatment.
Section 351 versus reorganization: comparison points
| Issue | Ordinary Section 351 contribution | Reorganization transfer |
|---|---|---|
| Control after exchange | Transferors must have the required immediate control after contributing property. | The applicable reorganization provisions impose their own statutory and regulatory requirements in addition to any Section 351 analysis. |
| Cash or other property | Cash or other property can produce recognized gain even when the liability is covered by Section 357(a). | Cash and other consideration may be limited by a continuity or voting-stock test. |
| Assumed liabilities over basis | Section 357(c) generally recognizes the excess over adjusted basis. | The same excess-liability rule can apply to qualifying Section 361 transfers in a Section 368(a)(1)(D) plan. |
| Tax-avoidance purpose | Section 357(b) can treat the liability as money received. | The Section 357(b) issue remains relevant, alongside the reorganization qualification tests. |
| Consideration mix | Section 357(a) generally prevents the assumption from being treated as other property for gain recognition. | Assumed liabilities can be counted with cash and other consideration for the applicable continuity or solely-voting-stock limitation. |
| Stock basis | Section 358 generally treats the liability as money received in determining stock basis. | The transferor’s basis consequences must still be computed, subject to the rules governing the particular reorganization. |
A practical method for reviewing a transaction
- Classify the transaction. Confirm whether the transfer is intended to qualify under Section 351, Section 361, or a Section 368 reorganization plan. Verify the required control or continuity conditions.
- Build a liability schedule. List every debt the corporation will assume and every liability that remains attached to transferred property. Identify the debtor, creditor, principal amount, security, and transfer date.
- Compute adjusted basis. Determine the tax basis of each transferred asset and total the basis for the Section 357(c) comparison. Do not substitute fair market value.
- Apply Section 357(a). If the exchange otherwise qualifies, exclude the assumption from money or other property for the default gain-recognition calculation.
- Test Section 357(b). Review the purpose of the assumption and retain evidence of a bona fide business purpose. If the principal purpose was federal tax avoidance or there is no bona fide business purpose, treat the liability as money received.
- Test Section 357(c). Compare assumed and attached liabilities with total adjusted basis. Recognize the excess when the rule applies.
- Compute stock basis under Section 358. Treat the assumed liability as money received for the stock-basis computation, then apply recognized gain and the other required adjustments.
- Run the reorganization consideration test. For a Section 368 transaction, include liabilities wherever the applicable regulation counts them with cash or other consideration. Use the transaction’s target-property value and the specific continuity or voting-stock limit.
- Document the conclusion. Keep the transfer agreement, debt instruments, valuation and basis schedules, board or shareholder approvals, financing rationale, and the analysis supporting the business purpose and reorganization qualification.
Common mistakes and how to avoid them
Calling every assumed mortgage boot
The default Section 357(a) rule generally prevents an assumed liability from being treated as money or other property when Section 351 or Section 361 otherwise applies. The assumption still requires the Section 357(b), Section 357(c), stock-basis, and—where relevant—reorganization tests.
Free tools Windows power users keep installed
One-click scans. No signup required.
Comparing debt with value instead of basis
Section 357(c) compares liabilities with adjusted basis. A property’s fair market value does not eliminate an excess-liability problem when its tax basis is smaller.
Best Value
- 【No Drill Mounted】Cable management tray can be assembled in as little as 3 minutes or less-simply. Side clips easily clampe the edge of desk, pass through the holes on the sides, and secure excess cables with baskets. Desk cable management supports inward or outward installation to meet your needs in different scenarios, and provides you with great convenience when collecting and organizing wires.
- 【Rubber Pad Protects Desk】Wire organizer under desk built-in soft rubber pads on the clamp protect your desk from scratches, so you will not damage your furniture or office.
- 【Sturdy and Beautiful】Cord management under desk is made of high-quality carbon steel and holds about 15 lbs. The wire basket has 2 holes on each side of the tray to enable your cables to pass freely. Cable baskets are suitable for desk thickness use from 0.4" to 2.4".
- 【Space Saving & Keep Organized】Desk cable management tray holds all your power cords, outlet strips, USB hubs and computer transformers hidden from your feet, and the data cables will not enter the vacuum cleaner to keep your desk clean and tidy. Desk wire organizer is also suitable for use in the kitchen and outdoors.
- 【Reduce Safety Risks】Cable tray under desk keeps all plugs away from your kids, no more worry about tripping. Using 2 holes wire tray saves extra space, helps you easily cabling and wire protection. The mesh design is not easy to accumulate dust, but avoids safety accidents caused by messy wires.
Testing each debt in isolation
The Section 357(c) calculation includes liabilities assumed and liabilities attached to transferred property against the total adjusted basis of the transferred property. Separating assets to avoid an aggregate calculation can produce the wrong result.
Ignoring the stock-basis consequence
No immediate gain under Section 357(a) does not mean the liability disappears. Section 358 generally reduces the transferor’s stock basis by treating the assumption as money received.
Stopping after the Section 357 analysis
In a reorganization, assumed liabilities may count toward a continuity or solely-for-voting-stock limitation even when they are not boot under Section 357(a). A separate Section 368 analysis is essential.
Failing to substantiate business purpose
Section 357(b) puts the proof burden on the taxpayer. A closing file should show why the corporation assumed the debt and how that reason fits the operating or restructuring objectives.
Limits of this analysis
The authorities above establish federal statutory and Treasury regulation rules. They do not determine state-tax treatment, financial-accounting classification, lender-consent requirements, debt-assumption mechanics under a particular contract, or the outcome of a transaction with unusual facts. The amount and character of recognized gain, stock basis, and reorganization qualification depend on the complete asset, liability, valuation, ownership, and transaction documents.
Quick Recap
Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.
