Figures: tax year 2026
All examples assume valid S status, individual shareholders, capital-asset stock, no special entity-level income tax, and no unlisted transactions. Dollar amounts are original client facts; stated rates are supplied assumptions.
Corporate nonrecognition generally requires property exchanged for stock and qualifying transferors controlling the corporation immediately afterward. Control requires at least 80% of voting power and 80% of each nonvoting stock class.
- Cash and noncash property qualify as property.
- Several property transferors may satisfy control collectively through an integrated exchange.
- Services do not constitute property. Shares issued solely for services do not help property transferors satisfy the control requirement.
- If qualifying requirements fail, the exchange generally becomes taxable. Related-party restrictions can still prevent recognition of an otherwise realized loss.
Realized gain or loss measures the economic change using amount realized less adjusted tax basis. Recognized gain or loss identifies the portion currently taken into account for tax purposes.
The contribution calculation separates these amounts:
- Fair market value (FMV): The exchange-date value of stock and other property received.
- Amount realized: Stock FMV plus cash, other property FMV, and liability relief included in the exchange.
Common mistakes
- Netting contributed assets too early. Taking the smaller of $50,000 net realized gain and $12,000 boot gives $12,000 incorrectly; separate asset calculations support $9,000 recognition.
- Ignoring liability relief in basis. Example 1's omits the $20,000 assumed debt; correct stock basis is $47,000.
- Treating AAA as shareholder basis. Example 6's $30,000 AAA tranche exceeds $25,000 stock basis, creating $5,000 capital gain before the dividend layer.
Bottom line
- Qualifying property contributions require immediate control and generally defer gain except for boot and applicable liability exceptions; contribution losses remain unrecognized.
- Liability relief can affect amount realized and stock basis without becoming ordinary boot, while excess liabilities and improper-purpose assumptions require separate recognition tests.
- Corporate contribution basis generally carries over adjusted basis plus recognized gain, subject to liability-related and aggregate built-in-loss limitations.
- Nonliquidating distributions recognize corporate appreciation but prohibit corporate loss; allocated gain increases stock basis before distribution treatment, and received property generally takes FMV basis.
Exam shortcut
Identify the transaction first: contribution, nonliquidating distribution, complete liquidation, or stock sale. Establish the applicable rules before inserting amounts. For contributions, mark stock value, boot, liability relief, and adjusted basis separately. Test ordinary liabilities, excess liabilities, and improper-purpose assumptions in that order. For distributions, build three amounts: corporate recognized gain, shareholder net distribution, and received-property basis. Debt can affect each differently.
The full lesson (about 6,505 words, 43 min read) adds 10 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.B2
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