What is a Section 351 Transaction?
A Section 351 transaction, defined by the Internal Revenue Code, occurs when an individual or group of individuals transfers property to a corporation in exchange for stock in that corporation (26 U.S. Code § 351).
Control Requirement
To qualify for tax-free treatment under Section 351, the transferor(s) must be in control of the corporation immediately after the exchange (26 U.S. Code § 351). Control is defined as owning at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation (26 U.S. Code § 368(c)).
Gain or Loss Recognition
If the requirements of Section 351 are met, no gain or loss is recognized by the transferor(s) (26 U.S. Code § 351(a)).
Stock-for-Property Exchange
The transfer of property to the corporation must be solely in exchange for stock in the corporation (26 U.S. Code § 351(a)). Cash or other non-stock consideration cannot be involved in the exchange.
Other Considerations
- If the property being transferred has unrealized gain, it is generally not recognized at the time of the Section 351 transaction.
- The control requirement considers the ownership of stock with voting power, but it does not have a value requirement.
- When there are multiple classes of voting stock, the control requirement can be an opportunity or a hindrance in obtaining tax-free treatment. Care should be taken in designing voting rights to avoid undue restrictions that reduce shareholders’ voting power below the 80% requirement.
- In a consolidated group, stock owned by all members of the group is included for determining the application of Section 351(a).
- The Obama administration’s fiscal year 2015 budget proposals aimed to conform the control test under Section 368(c) with the affiliation test under Section 1504, which would change the definition of “control” to include ownership of at least 80% of the total voting power and at least 80% of the total value of the stock of a corporation.
Sources
FAQs
What is a 351 transaction?
A 351 transaction, also known as a Section 351 transaction, refers to a provision in the United States Internal Revenue Code (Section 351) that allows for the tax-free transfer of property to a corporation in exchange for stock.
How does a 351 transaction work?
In a 351 transaction, individuals or entities contribute property, such as cash, assets, or liabilities, to a corporation in exchange for stock in that corporation. The transfer is generally tax-free, meaning that the contributors do not recognize any gain or loss on the transfer.
What are the requirements for a 351 transaction?
To qualify for tax-free treatment under Section 351, certain requirements must be met. These requirements include the transfer of property to a corporation, the transfer being solely in exchange for stock, and the transferors being in control of the corporation immediately after the transaction.
What are the benefits of a 351 transaction?
A 351 transaction offers several benefits. Firstly, it allows for the tax-free transfer of property to a corporation, enabling individuals or entities to contribute assets without triggering immediate tax consequences. Additionally, it facilitates the formation of a corporation by aggregating resources from multiple contributors and providing them with an ownership stake in the new entity.
Are there any limitations or restrictions associated with 351 transactions?
While 351 transactions offer tax advantages, there are certain limitations and restrictions to consider. For example, if the transferors receive any form of boot (property or cash) in addition to stock, they may be subject to tax on the boot received. Additionally, the transaction must meet the specific requirements outlined in Section 351 to qualify for tax-free treatment.
Can individuals and entities other than corporations engage in 351 transactions?
Yes, 351 transactions are not limited to corporations alone. Partnerships and other entities can also engage in 351 transactions, provided they meet the requirements specified in Section 351 of the Internal Revenue Code.
Does a 351 transaction have any reporting requirements?
Yes, a 351 transaction typically requires certain reporting obligations. The contributors must disclose the details of the transaction, including the nature of the property transferred, the value of the stock received, and other relevant information, on their tax returns.
Can professional advice be beneficial for navigating 351 transactions?
Absolutely. Given the complex tax implications and requirements associated with 351 transactions, seeking professional advice from tax attorneys or certified public accountants (CPAs) experienced in corporate tax law is highly recommended. They can provide guidance tailored to specific circumstances, ensuring compliance with regulations and maximizing the benefits of the transaction.