In the current tax system, a corporation is treated as a separate taxable entity. This tax system is sometimes referred to as an entity tax or a double tax system. Since a corporation is a separate and distinct entity from its owners, the shareholders, the default rule is that transfers between them are treated as realization events. Without a specific Internal Revenue Code (Code) provision providing otherwise, such transactions will also require the parties to recognize the realized gain or loss. Congress has enacted several nonrecognition corporate provisions when forcing the recognition of income could prevent changes to the form of ownership from taking place even if the changes would provide a more efficient and economically beneficial structure. One such provision is section 351, which provides nonrecognition treatment to shareholders who contribute property to a controlled corporation in exchange for corporate stock. When section 351 applies, the shareholder's basis in the corporate stock received and the corporation's basis in the contributed property are calculated to carry forward any realized, but unrecognized gains or losses (subject to certain exceptions described in this article).
Kahn, Douglas A. "Prevention of Double Deductions of a Single Loss: Solutions in Search of a Problem." J. H. Kahn, co-author. Va. Tax Rev. 26, no. 1 (2006): 1-51.