Property transfers under Section 351

• Published in: The CPA journal (1975) 1981-03, Vol.51 (3), p.42
• Main Authors: Goodman, Leonard, Lipka, Roland
• Format: Article
• Language: English
• Subjects: Affiliates; Control; Disadvantages; Exchange; Income; Internal Revenue Code; Investments; Property; Securities; Stockholders; Tax deferred privileges; Tax free exchanges; Taxation; Tests; Transfers
• ISSN: 0732-8435

The transfer of property to a controlled corporation in exchange for stock or securities should be tax-free under Section 351 of the Internal Revenue Code (IRC). A set of control tests can be used to determine whether the transfer involves a controlled corporation. Relevant questions are: 1. Does the owner receive stock or securities from the corporation? 2. Are the property or services transferred to the corporation? 3. Is the value of the property material relative to the value of the services? 4. Was the transaction planned? If yes, was the value of securities significant compared to prior investment? 5. Does control exist after the transactions? After successful completion of the control tests, various income tests can be used to determine the amount taxable. Key considerations in these tests are: 1. whether the accrual basis is used, 2. whether liabilities are assumed and their value, 3. whether the owner receives a boot, and 4. whether a gain is realized. Undesirable consequences of a Section 351 transfer include: 1. the postponement of deductible losses, 2. unfair taxation of boot and excess liabilities, 3. unreasonable calculation of excess liabilities, and 4. double taxation of deferred gains.