One of the most painful outcomes on the formation of a corporation in a tax-free exchange is to discover, too late, that indebtedness taken over by the corporation exceeded the income tax basis of the property transferred to the corporation. It is a fundamental requirement of a transfer to a corporation that if the corporation assumes a liability of the transferor or takes property subject to a liability, as for example a mortgage, the amount of the liability is treated as money received and reduces the basis of the stock received.
"Avoiding Gain When Indebtedness Exceeds Basis,"
Agricultural Law Digest: Vol. 9
, Article 1.
Available at: http://lib.dr.iastate.edu/aglawdigest/vol9/iss17/1