How do I compute stock basis and corporate basis in a Section 351 transaction?

Two formulas. Section 358 governs the transferor's basis in stock. Section 362 governs the corporation's basis in property.

Section 358 stock basis = transferor's basis in property minus boot received minus liabilities assumed plus gain recognized.

Section 362 corporate basis in property = transferor's basis in property plus gain recognized by transferor.

Worked example. Transferor contributes property with adjusted basis 40,000 and FMV 100,000. Receives stock worth 90,000 and cash of 10,000. No liabilities assumed.

Step 1: Realized gain = 100,000 minus 40,000 = 60,000.

Step 2: Boot = 10,000.

Step 3: Recognized gain = lesser of boot or realized gain = 10,000.

Step 4: Transferor stock basis = 40,000 minus 10,000 minus 0 plus 10,000 = 40,000.

Step 5: Corporate property basis = 40,000 plus 10,000 = 50,000.

The deferred gain of 50,000 remains in both numbers: the transferor's stock has a built-in gain of 50,000 (stock value 90,000 minus stock basis 40,000), and the corporation's property has a built-in gain of 50,000 (property value 100,000 minus corporate basis 50,000).

When property is contributed with built-in loss and the corporation and transferor are related, Section 362(e)(2) caps the corporation's basis at FMV to prevent loss importation. The transferor can elect to keep the loss on their side by reducing stock basis instead, but the loss cannot be duplicated in both bases.