A.

Pursuant to §357(c), a transferor must recognize gain to the extent that the amount of the transferor’s debt the corporation “assumes” or debt that encumbers property received by the corporation from the transferor in a §351(a) contribution transaction, exceeds the aggregate basis of the assets contributed by the transferor to the corporation. The character of gain as ordinary income or capital gain is based on the character of the assets transferred to the corporation. Reg. §1.357-2(b), Example 2 (a controversial regulation) specifies that the ordinary income versus capital gain determination is made using a proportional calculation comparing the fair market value of each asset to the aggregate fair market value of all the property contributed to the corporation by the transferor in a §351 transaction. The calculation does not focus on the tax basis or unrealized gain contained in each asset. Consequently, it is possible that gain will be allocated to an asset that would (i) produce a loss if the asset had been sold or (ii) generate more gain than determined under the regulation, if the asset had been sold by the transferor. Potentially, an odd result could occur under this regulation. The regulation likely is challengeable under Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024).