Section 351 Exchanges: Meeting Requirements for Nonrecognition of Gain, Avoiding Missteps, Common Scenarios

IRC Section 351 provides that "No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation." Transferring appreciated property to a corporation in a nontaxable transaction provides considerable tax savings for the transferor. However, to reap the benefits of a Section 351 exchange, specific requirements must be satisfied.

Section 368(c) defines control as 80% ownership of the total combined voting power of all classes of stock and at least 80% of the total number of shares of all other classes of stock (non-voting) of the corporation. Additionally, the transferor must contribute qualifying property. This property could include cash, real estate, inventory, and tangible or intangible assets. 

Tax-free treatment under Section 351 is not elective. Specific violations of Section 351 requirements can create taxable exchanges. Services, for example, are not considered property under Section 351. Liabilities that exceed the transferor's adjusted basis in the property transferred or transfers that include boot could trigger tax consequences.  

Under certain conditions, a transferor may want a transfer to be subject to tax. A transferor may want to recognize losses on built-in loss property, a purchaser might need a stepped-up basis in the assets transferred, or future higher tax rates might be expected. Business owners, tax advisers, and other stakeholders need to understand the benefits of Section 351 to avoid missteps and maximize the tax-saving benefits it provides.

Listen as our panel of federal income tax professionals explains meeting the requirements of Section 351 to effectuate tax-free exchanges.

I. Section 351 exchanges: introduction

II. Meeting the requirements

A. Property

B. Receipt of stock

C. Control

D. Business purpose

III. Exceptions

IV. Examples

The panel will cover these and other critical issues:

• Meeting the control test under Section 351
• Common missteps that could negate tax-free treatment under Section 351
• Examples of tax-saving exchanges that qualify as tax-free exchanges
• Qualifying property under Section 351

Learning Objectives

After completing this course, you will be able to:

• Identify exchanges that qualify for tax-free treatment under Section 351
• Determine what constitutes qualifying property in a Section 351 transaction
• Decide when taxpayers could benefit from a Section 351 exchange
• Ascertain potential missteps that could negate Section 351 tax-free treatment

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite:

  Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and their respective partners and shareholders.

  
  

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).