Organizations may defer the recognition of gain realized on the conversion of property from one form to another by structuring the conversion as a nontaxable exchange. The deferral reduces the the tax cost of the conversion and increases the value of the transaction. This discussion centers around the tax provisions that allow the transfer of assets to a corporation or partnership in exchange for an equity interest without the recognition of gain. In your discussion, address the following:

3.Explain the difference between a substituted basis in an asset and a carryover basis in an asset and how it relates to the nontaxable exchange in the formation of business entities.