(1)(a) Section 351(a) applies. Upon exchange with X, (1) A’s amount realized is $100; (2) A’s gain realized is $60; (3) nothing is recognized, because of § 351(a); (4) A’s basis in stock received is $40 under § 358(a)(1); (5) A’s holding period in the stock tacks under § 1223(1); (6) X’s basis in property is $40 under § 362(a)(1); (7) X’s holding period for property received tacks under § 1223(2); and (8) X would recognize $60 long-term capital gain on a sale of the property. On the separate sale of half the stock, A realizes and recognizes a capital gain of $30 and has a basis of $20 in the remaining 50 shares, which B takes a cost basis of $50 in the purchased shares. B&E¶ 3.10,3.11. If the property’s basis were $200, loss would not be recognized under § 351(a) (whether or not boot is received) and the losses will be built into the stock basis as well as the property basis inside the corporation. Then when A sells half the stock to B, A will recoup $50 loss, retaining a $100 basis in the other half of the stock. Thus, there is a full doubling of the $100 loss in the property (although the Service hates this result, since it forms the foundation for many tax shelter transactions).
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