Under IRC 362, the corporate basis rules give a corporation a carryover basis in property it receives through a tax-free or partially tax-free transfer: the corporation takes the transferor’s adjusted basis, increased by any gain the transferor recognized on the exchange. That single formula runs through Section 351 formations, reorganizations under Section 368, and capital contributions, and it is limited by a fair-market-value cap and by anti-abuse rules for built-in losses.1Office of the Law Revision Counsel. 26 USC 362 Basis to Corporations
Section 351 Transfers: The Core Carryover Rule
IRC 362(a) applies most often to property transferred to a corporation in exchange for its stock under IRC 351. The transferors, as a group, must own at least 80 percent of the total voting power and at least 80 percent of every other class of stock immediately after the exchange. That “control” threshold comes from IRC 368(c), and both the voting-power test and the share-count test have to be met.2Office of the Law Revision Counsel. 26 U.S. Code 368 – Definitions Relating to Corporate Reorganizations Miss either one and the transfer is taxable; 362(a) never engages.
When the transfer qualifies, the corporation’s basis in each asset equals the transferor’s basis at the moment of exchange. Say you contribute a building bought for $200,000 and now worth $500,000. You recognize no gain on the $300,000 of appreciation, but the corporation does not get a stepped-up $500,000 basis. It takes your $200,000 basis, inherits your depreciation schedule, and carries the recapture exposure with it. That deferred gain surfaces when the corporation eventually sells.
Holding Period Tacking
Because the basis carries over, so does the holding period. IRC 1223(2) treats the corporation as having held the property for as long as the transferor did, which controls the long-term versus short-term character of any future gain.3Office of the Law Revision Counsel. 26 USC 1223 Holding Period of Property
Boot and the Basis Adjustment
If the transferor also receives cash, debt relief, or other non-stock property, that “boot” forces gain recognition up to its value. IRC 362(a) then increases the corporation’s carryover basis by the gain the transferor recognized. A $200,000 original basis paired with a $50,000 recognized gain gives the corporation a $250,000 basis in the property.1Office of the Law Revision Counsel. 26 USC 362 Basis to Corporations
Assumed Liabilities
Property often comes into a corporation carrying debt. IRC 357(a) says the corporation’s assumption of that liability, standing alone, does not trigger gain. Two exceptions change the result.
Under IRC 357(b), if the principal purpose of the assumption is tax avoidance or the assumption lacks a genuine business purpose, the full liability is treated as boot. The transferor recognizes gain to that extent, and the corporation’s basis picks up a matching increase under 362(a).
Under IRC 357(c), if total liabilities assumed exceed the total adjusted basis of the contributed property, the excess is recognized gain. Transfer property with a $100,000 basis subject to a $150,000 mortgage, and $50,000 of gain is recognized. The corporation’s basis rises by $50,000.
The 362(d) Fair-Market-Value Cap
IRC 362(d) sets a ceiling on this liability-driven adjustment. The basis of any property cannot be increased above its fair market value solely because of gain the transferor recognized on an assumed liability.1Office of the Law Revision Counsel. 26 USC 362 Basis to Corporations The cap keeps a corporation from generating basis, and the depreciation deductions that follow, in excess of what the property is actually worth.
Basis in Corporate Reorganizations
IRC 362(b) applies the same carryover-plus-recognized-gain formula to property acquired in a tax-free reorganization under IRC 368. The acquiring corporation takes the target’s basis in each asset, increased by any gain the target recognized on the transfer.1Office of the Law Revision Counsel. 26 USC 362 Basis to Corporations
There is a carve-out. Subsection (b) does not apply to stock or securities of a corporation that is a party to the reorganization, unless those stock or securities were acquired by exchanging stock or securities of the acquiring corporation (or its parent) as part of the deal. So the rule covers operating assets but not every equity interest received in the transaction. The 362(d) fair-market-value cap applies here as well.
Capital Contributions
When a shareholder contributes property to the corporation without receiving new stock in return, IRC 362(a)(2) still applies. The corporation takes the shareholder’s historical basis, plus any gain the shareholder recognized.1Office of the Law Revision Counsel. 26 USC 362 Basis to Corporations
Non-Shareholder Contributions After the TCJA
IRC 362(c) once governed contributions from non-shareholders, giving the corporation a zero basis in property received and requiring a downward basis adjustment for assets bought with non-shareholder cash within 12 months. The Tax Cuts and Jobs Act of 2017 narrowed this area by amending IRC 118. Contributions by any governmental entity or civic group, other than a shareholder acting in its capacity as shareholder, no longer qualify as tax-free contributions to capital.4Office of the Law Revision Counsel. 26 U.S. Code 118 – Contributions to the Capital of a Corporation Customer contributions, including contributions in aid of construction, are also out. A narrow exception exists for certain water and sewerage disposal utilities.
In practice, most incentives that once fell under 362(c) are now taxable income, and the corporation takes a fair-market-value cost basis like any other taxable acquisition. The 362(c) mechanics remain in the statute, but they apply to a smaller universe of transactions.
Built-In Loss Limitations Under 362(e)
IRC 362(e) contains two anti-abuse rules designed to keep corporations from acquiring inflated tax losses through property transfers.
Loss Importation — 362(e)(1)
The first rule targets property moving into the U.S. tax system. If the property was not subject to U.S. tax in the transferor’s hands but becomes subject to U.S. tax in the corporation’s hands, and the aggregate adjusted bases of the transferred property would exceed the aggregate fair market value, the corporation’s basis in each property is capped at fair market value.1Office of the Law Revision Counsel. 26 USC 362 Basis to Corporations The provision blocks the strategy of shifting loss property into a domestic corporation to claim U.S. deductions that were never available abroad.
Duplicated Loss — 362(e)(2)
The second rule reaches domestic Section 351 transfers and capital contributions that the importation rule does not cover. If the aggregate adjusted basis of all transferred property exceeds its aggregate fair market value immediately after the transaction, the corporation reduces its total basis to equal that fair market value.1Office of the Law Revision Counsel. 26 USC 362 Basis to Corporations
Transfer an asset with a $100,000 basis and a $60,000 fair market value, and the corporation’s basis is reduced to $60,000. Without this cap, both parties could claim the same $40,000 loss: you through your stock basis and the corporation through its asset basis. When multiple properties change hands and only some carry built-in losses, the total reduction is allocated among the loss properties in proportion to their respective built-in losses. A property with a built-in gain keeps its full carryover basis.1Office of the Law Revision Counsel. 26 USC 362 Basis to Corporations
The Election to Reduce Stock Basis Instead
The transferor and the corporation can jointly elect under IRC 362(e)(2)(C) to leave the corporation’s asset basis intact and instead reduce the transferor’s stock basis to fair market value. The election is irrevocable.1Office of the Law Revision Counsel. 26 USC 362 Basis to Corporations It often makes sense when the corporation intends to depreciate or sell the property soon, because preserving the higher asset basis produces earlier tax benefit than preserving stock basis.
The election is made on or with the tax return for the year of the transfer, filed by the due date including extensions. The transferor attaches a certification identifying both parties, their taxpayer identification numbers, and the transfer date, in the format set by IRS Notice 2005-70. When the transferor is a controlled foreign corporation, the controlling U.S. shareholders file the certification. A taxpayer who is unsure whether 362(e)(2) applies can file a protective election: it has no effect if the rule does not apply, and it locks in the choice if it does.5Internal Revenue Service. Notice 2005-70
Disclosure and Recordkeeping
Any “significant transferor” in a Section 351 exchange attaches a disclosure statement to the income tax return for the year of the transfer. The statement covers:
- The name and employer identification number of the corporation receiving the property.
- The date or dates the assets were transferred.
- The fair market value and adjusted basis of the property immediately before the transfer, broken out by category: importation property, loss duplication property, and property on which gain or loss was recognized.
The corporation should keep permanent records supporting every carryover basis figure and later adjustment. On examination, the IRS will test whether the reported basis matches the transferor’s historical records, whether recognized gain was properly added, and whether the 362(e) rules were applied. Contemporaneous appraisals matter for any property that could trigger a fair-market-value cap or a duplicated-loss reduction, and the same records feed the depreciation and recapture calculations for as long as the corporation holds the asset.