Bill Archer: “I would like to provide background for and an explanation of the tax provision contained in H.R. 435. Clarify Definition…”

“I would like to provide background for and an explanation of the tax provision contained in H.R. 435. Clarify Definition of ``Subject to'' Liabilities Under Section 357(c) present law Present law provides that the transferor of property recognizes no gain or loss if the property is exchanged solely for qualified stock in a controlled corporation (sec. 351). The assumption by the controlled corporation of a liability of the transferor (or the acquisition of property ``subject to'' a liability) generally will not cause the transferor to recognize gain. However, under section 357(c), the transferor does recognize gain to the extent that the sum of the assumed liabilities, together with the liabilities to which the transferred property is subject, exceeds the transferor's basis in the transferred property. If the transferred property is ``subject to'' a liability, Treasury regulations indicate that the amount of the liability is included in the calculation regardless of whether the underlying liability is assumed by the controlled corporation. Treas. Reg. sec. 1.357-2(a). Similar rules apply to reorganizations described in section 368(a)(1)(D). The gain recognition rule of section 357(c) is applied separately to each transferor in a section 351 exchange. The basis of the property in the hands of the controlled corporation equals the transferor's basis in such property, increased by the amount of gain recognized by the transferor, including section 357(c) gain.”