Is there another way to avoid recognizing the gain on a 351 transaction besides the one given below?
There are ways to play this system. The reason that the tax on a 351 transaction is deferred until the stock is sold is because the person's basis in the stock received in a 351 transaction is the same as the basis in the property that was transferred to the corporation for the stock. That means that whatever gain was realized in the 351 transaction (the difference in the basis in the property transferred and the value of the stock received) is recognized when the stock is sold. However, if I am involved in a 351 transaction and never sell my stock and leave that stock to someone in my will, the person who receives that stock gets the stock with a basis equal to the stock's fair market value on the date of my death, so, at least in theory, that gain that is deferred by 351 disappears and is never taxed. Of course, that's an extreme example but, still, an example of how to avoid the gain on a 351 transaction.