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The built-in gains tax is a liability that carries over and is assumed by New T.(It is assumed that the tax liability that results under ยง 1374 remains a liability of the target corporation after the transaction, although the regulations under Reg.

, except that Old T's gross inside asset basis is $30,000, which has been reduced by accumulated depreciation of $10,000, for a net adjusted asset basis of $20,000.

Accumulated depreciation subject to recapture as ordinary income is $3,000. , the total gain on the deemed asset sale is $33,000.

However, this basis increase has come at the cost of an increased tax liability to S.

Ordinarily this increase in basis available to the buyer will cause the parties to agree to increase the purchase price to cover at least some of S's increased tax liability. S will recognize capital gain on the sale of the stock, P will take a basis in the stock equal to the cash purchase price, and Old T will retain its historic tax basis in its assets.

S would recognize $40,000 gain ($50,000 sales price minus $10,000 basis).