(a) For purposes of section 358, where a party to the exchange assumes a liability of a distributee or acquires from him property subject to a liability, the amount of such liability is to be treated as money received by the distributee upon the exchange, whether or not the assumption of liabilities resulted in a recognition of gain or loss to the taxpayer under the law applicable to the year in which the exchange was made.
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(b) The application of paragraph (a) of this section may be illustrated by the following examples:
Example 1.
A, an individual, owns property with an adjusted basis of $100,000 on which there is a purchase money mortgage of $25,000. On December 1, 1945, A organizes Corporation X to which he transfers the property in exchange for all the stock of Corporation X and the assumption by Corporation X of the mortgage. The capital stock of the Corporation X has a fair market value of $150,000. Under sections 351 and 357, no gain or loss is recognized to A. The basis in A's hands of the stock of Corporation X is $75,000, computed as follows:
| Adjusted basis of property transferred | $100,000 |
| Less: Amount of money received (amount of liabilities assumed) | —25,000 |
| Basis of Corporation X stock to A | 75,000 |
Example 2.
A, an individual, owns property with an adjusted basis of $25,000 on which there is a mortgage of $50,000. On December 1, 1954, A organizes Corporation X to which he transfers the property in exchange for all the stock of Corporation X and the assumption by Corporation X of the mortgage. The stock of Corporation X has a fair market value of $50,000. Under sections 351 and 357, gain is recognized to A in the amount of $25,000. The basis in A's hands of the stock of Corporation X is zero, computed as follows:
| Adjusted basis of property transferred | $25,000 |
| Less: Amount of money received (amount of liabilities) | —50,000 |
| Plus: Amount of gain recognized to taxpayer | 25,000 |
| Basis of Corporation X stock to A | 0 |