Section 351: When Is Corporate Formation Tax Free?
Section 351 is a nonrecognition rule for qualifying property-for-stock transfers when the control requirement is met.
Property for stock
The transferors generally must transfer qualifying property in exchange for stock.
Control immediately after
The transferor group must satisfy the applicable control requirement immediately after the exchange. The commonly tested threshold is 80% under the statutory definition.
Services are different
Stock received for services generally does not receive the same nonrecognition treatment as qualifying property contributions and can create compensation income.
Boot
Receiving cash or other nonqualifying property in addition to stock can trigger gain recognition subject to the applicable rules.
Basis
Keep shareholder stock basis separate from the corporation's basis in transferred assets. Basis preserves deferred gain for future taxation.
The takeaway
Section 351 can defer tax. It does not erase the gain.
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FAQ
What is the commonly tested control threshold?
80% under the statutory definition.
Do services count as property?
No.
Can boot create gain?
Yes.