After the expiration of the transition period provided in paragraph (a)(5)(i) of this section, individual A, pursuant to a plan, contributes all of the outstanding stock of Y to his wholly owned S corporation, X, and immediately causes X to make a QSub election for Y.
The transaction is a reorganization under section 368(a)(1)(D), assuming the other conditions for reorganization treatment, such as continuity of business enterprise, are satisfied.
If the sum of the amount of liabilities of Y treated as assumed by X exceeds the total of the adjusted basis of the property of Y, then section 357(c) applies and such excess is considered as gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be.
Individual A drops the Y stock into his wholly owned S corporation X, then checks the box by causing X to make a QSub election for Y.
The combined steps are treated as a reorganization under section 368(a)(1)(D), assuming the other reorganization requirements are met.
If assumed liabilities of Y exceed the adjusted basis of its property, the excess is treated as gain under section 357(c).
Reorganization treatment depends on satisfying the non-statutory tests, including continuity of business enterprise.
