In a Section 351 transfer 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 - as defined in Section 368(c) - of the corporation.
Control of the corporation is defined as ownership of 80% of more 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. IRC 368(C).
One or more persons may include individuals, trusts, estates, partnerships, associations or corporations. Money is treated as property for purposes of Section 351. Services do not qualify as property for purposes of Section 351.
Transfers in bankruptcy do not qualify for the Section 351 treatment.
If a transferor receives boot in the exchange, the gain is realized to the extent of the money or property received (boot).
Group control in a Section 351 exchange must include substantial contributions by shareholders. For instance two shareholders cannot contribute to meet the 80% control test if the contribution by either shareholder is less than 10% of fair market value of stock and securities already owned by the person.
Liabilities contributed in a Section 351 exchange reduce the basis of the shareholders stock. If the liability contributed exceeds the basis, the excess is treated as gain.
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