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Tag Archive for IRC 351

Transfers of Property to a Corporation – IRC Sec. 351

TaxConnections Picture - Home - OfficeAccording to IRC 1001 you generally recognize a gain or a loss when you sell or dispose of property. However, there are a number of exceptions, specifically transfers of property to a corporation.

For example under IRC 351a no gain or loss is recognized if property is transferred to a corporation in exchange for stock in the corporation if immediately after the exchange the person transferring the property in question is in control of the corporation that received ownership of the property.

The intent of IRC 351 I believe is to apply when there is simply a change in the form of ownership of the property in question and you have not really profited or cashed out a loosing investment, which it turns out is a reasonable rule of thumb to use in making a determination as to whether a gain or loss is recognizable upon transfer.

The majority of the nonrecognition transfers of property I have been involved with to date have generally taken place in conjunction with forming a new corporation but these tax code sections also apply to transfers of property made to existing corporations.

Tax Treatment – IRC 351 Nonrecognition Transactions aka “Corporate Reorganizations”

Check out the following five lessons I learned this week regarding IRC 351 nonrecognition transactions:

1. The basis assigned to stock received generally is the same as the basis in the property transferred to the corporation. If however you also receives boot from the corporation your basis must be decreased by the amount of any money received plus the fair market value of any other property received (aka BOOT).

2. Your basis under IRC 358(a) must also be increased by the amount of any gain recognized due to any boot received. Specifically if you transfers property with a fair market value of $700,000 and a basis of $300,000 to a corporation in exchange for common stock with a fair market value of $500,000 and cash of $200,000 your basis in the stock is equal to $300,000 which is calculated as follows:

$300,000 basis in property transferred – $200,000 boot received (as cash) + $200,000 gain recognized due to receipt of boot.

3. When transferred property is subject to a liability that the corporation assumes, the amount of the liability generally is not treated as boot for purposes of determining any taxable gain on the transaction. However, the amount of the liability generally is treated as boot for purposes of determining your basis in Read more

What is “Boot”?

Tax Treatment of Liabilities Assumed By A Corporation IRC 357

According to IRC 357(a) if property transferred to a corporation in an IRC 351 nonrecognition transaction is subject to a liability, the assumption of that liability by the corporation typically is not treated as taxable “boot” for purposes of determining the amount of any taxable gain on the transaction.

For example, if you transfer computer programs and peripheral devices to a software development corporation in exchange for stock in that corporation with a fair market value of $2,500,000 and immediately after the exchange you control the corporation in question, if the property transferred to the corporation has a fair market value of $4,000,000 and is subject to a development loan of $1,500,000 when the corporation assumes the development loan the transfer of property to the corporation qualifies for Code Sec. 351 nonrecognition treatment. Generally speaking you should not recognize any gain on the Corporation’s assumption of the liability.

The amount of the liability generally is treated as “boot” predominately for determining your basis in the stock received in the exchange. What this means is that if you transfer property to a corporation in exchange for its stock and also receive money or other property (aka “boot”) in addition to the stock, the transaction may still qualify for Read more

Requirements For Nonrecognition Of Gain Or Loss On Transfer Of Property To A Corporation IRC 351

If property is transferred to a corporation by one or more people solely in exchange for stock in the corporation and immediately after the exchange the person or people engaged in the exchange are in control of the corporation then generally speaking subject of course to certain thresholds no gain (or loss) is recognized for tax purposes. This is often referred to as a nonrecognition or 351 transaction which is a reference to the tax code number governing the transaction. The following four requirements must be met for a transaction to qualify as a Code Sec. 351 transaction:

1. The transaction must involve a corporation and a person (or people).

A person may be an individual, trust, estate, partnership, association, company, or corporation under IRC 7701(a)(1)

A corporation generally is an organization that is incorporated under state law. However, a corporation can also include an associations, joint-stock company, or insurance company.

2. The people involved must transfer property to the corporation.

The IRC does not specifically define property in these regards however the courts and the Internal Revenue Service have attempted to do just that, define property relevant to 351.

Generally it seems in my opinion the courts define property broadly and have a limited view of what can be excluded Read more

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