This video explains how to calculate the transferee corporation's basis in assets received in a Section 351 transaction when the builtin loss limitation applies. The corporation's basis is determined by taking the basis of the asset in the transferor's hands, adding any gain recognized by the transferor, and subtracting the asset's share of any builtin loss limitation. The builtin loss limitation applies when the aggregate adjusted basis of all properties transferred exceeds their aggregate fair market value. The difference is the amount of the builtin loss limitation, which is allocated to each asset with a builtin loss based on the asset's relative share of all builtin losses.

It is important to note that builtin gains offset builtin losses. Also, if the transferor and transferee agree, the corporation can avoid the builtin loss reduction by instead reducing the transferor's basis in the stock received.

The builtin loss limitation is intended to prevent the doubling up of losses and is found in Section 362(e) of the U.S. tax code.—
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