Explain why the antistuffing rules were enacted to limit the deductibility of losses realized by a corporation upon liquidation

Answer 1

The loss limitation ("antistuffing") rules were enacted primarily to address the artificial losses that could otherwise result with respect to properties that were acquired by a corporation in carryover basis transactions (i.e., § 351 and contribution to capital transactions). When loss property (i.e., fair market value less than adjusted basis) is transferred to a corporation and a carryover basis applies, there exists the possibility loss could be recognized twice: once upon disposition of the property by the corporation, and again upon disposition of the transferring shareholder's stock. The antistuffing rules are not limited to carryover basis scenarios (e.g., the related-party loss limitation can apply with respect to property that is acquired in a non-carryover basis transaction), but the overriding reason for the enactment of the rules was to limit the opportunities for taxpayers to use carryover basis transactions to create artificial losses. The enactment of the basis step-down rules for loss properties acquired in carryover basis scenarios reduces the impact of the antistuffing rules upon liquidation, particularly with respect to the built-in loss limitation.