Sometimes in a § 351 exchange, a transferor receives not just stock but also cash or other property – what tax lawyers call “boot.” When that happens, the transferor may have to recognize gain. § 351(b).
The amount of gain recognized is the lesser of (1) the gain realized on the exchange, or (2) the amount of boot received. You can’t recognize loss, even if you receive boot. § 351(b)(2). The character of the gain (capital or ordinary) depends on the character of the assets transferred.
Rev. Rul. 68‑55, 1968‑1 C.B. 140, illustrates how to compute gain when multiple assets are transferred. In the ruling, Corporation X transferred three assets to Corporation Y. Asset 1 had a built‑in loss, Asset 2 had short‑term capital gain, and Asset 3 was § 1245 property with ordinary income recapture potential. X received stock worth 10x.
The IRS held that you can’t net gains and losses across assets. Instead, you allocate the boot proportionally among the assets based on their fair market values. So the 2x to Asset 1 (which had a loss – not recognized),
5x to Asset 3 (recognized as ordinary income under § 1245). This prevents taxpayers from using boot to “cash out” built‑in losses or change the character of gain.
The bottom line: If you’re receiving boot, you need to track each asset separately.
This article is for general informational purposes only and is subject to change. Tax laws are complex and vary by situation. You should consult a qualified professional for advice specific to your circumstances. For questions, contact Alan Goldstein.
Was this helpful?
0 / 0