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IRC 351 (Explained: What It Is And What You Should Know)

What is IRC 351?

What rule applies to the transfer of property to a corporation?

How does IRC 351 work?

Keep reading as we have gathered exactly the information that you need!

Let me explain to you what IRC 351 transfers entail and how they work!

Are you ready?

Let’s get started!

What Is IRC 351

IRC 351 refers to Section 351 of the Internal Revenue Code titled “Transfer to corporation controlled by transferor”.

The rule under 351 IRC is that no gains or losses should be recognized by a taxpayer if a property is transferred to a corporation solely in exchange for stock and if the transferor will control the corporation.

Section 351 IRC Code states:

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.
Author

The main objective behind this provision was to allow you to incorporate a new corporation, transfer property to the newly created corporation, and put off any tax consequences from the transfer.

As a result, under Section 351(a), you will not have to recognize any gains or losses on the transfer of your property if:

  • You receive stocks of the company in exchange for the property
  • You have “control” of the corporation after the property transfer

Keep in mind that the IRC Section 351 rule is not elective.

In essence, if you transfer property that meets the requirements of Section 351, you will not have to report gains or losses for that fiscal year.

You may want to assess wether or not you will want to have your transfer qualify under IRC Code 351 as sometimes you may want to avoid the qualification and recognize a loss on the property transfer or use loss carryovers.

IRC Section 351 Overview

IRC Section 351 establishes the rule that a person can defer the tax consequence of transferring property to a corporation under specific circumstances.

IRS Code 351 is a complex provision consisting of many paragraphs and subparagraphs outlined as follows: 

  • IRC 351(a) General rule
  • IRC 351(b) Receipt of property
  • IRC 351(c) Special rules where distribution to shareholders
  • IRC 351(d) Services, certain indebtedness, and accrued interest not treated as property
  • IRC 351(e) Exceptions
    • (1)Transfer of property to an investment company
    • (2)Title 11 or similar case
  • IRC 351(f) Treatment of controlled corporation
  • IRC 351(g) Nonqualified preferred stock not treated as stock
    • (1)In general
    • (2)Nonqualified preferred stock
    • (3)Definitions
    • (4)Regulations
  • IRC 351(h) Cross references

How IRC 351 Works

In order to understand how IRC 351 works, let’s first look at the general tax rule applicable to transfers of property to corporations.

General Tax Rule

The general tax rule applicable to you when you transfer property to a corporation in exchange for stock is that it’s considered a “taxable event”.

In other words, the transferor will need to recognize gain or loss on the transfer of property in relation to the fair market value of the stocks received.

If the transferor’s tax basis in the property is below the fair market value of the stocks received, then the transferor will have a gain.

On the other hand, if the transferor’s tax basis is above the fair market value of the stocks received, the transferor will have a loss.

Purpose of IRC 351

The purpose of IRS Code Section 351 is to alleviate tax liability in certain circumstances.

For example, imagine that you are incorporating a new corporation and wish to transfer property to the corporation to get started.

If the general rule were to apply, you will incur tax liability by merely transferring property to a shell company that still has no revenues or means to pay you.

This would not be a fair outcome.

As a result, Congress enacted Section 351 to remove this unfair tax barrier particularly to those who are incorporating a new business or moving their unincorporated business to a corporation.

With Section 351 IRS, you can defer your tax liability from the transfer of property to the future, namely when the shareholder’s stocks are eventually sold or disposed of.

Section 351 Transfer

A “Section 351 transfer” is a type of transfer that allows you to be exempt from having to recognize any gains or losses in the year where you transfer property to a corporation.

For the IRS 351 rule to apply, you need to ensure that you satisfy its requirements.

You can benefit from a tax deferral under IRC Section 351 if:

  • You only receive stock in exchange for your property 
  • Immediately after the transfer, you control the corporation

“Control” Under IRC 351

The notion of “control” under IRS Section 351 is when you stocks giving you at least 80% of the voting rights of all classes of the stocks bearing voting rights and that you have at least 80% of the total number of outstanding shares of all other classes of stock.

“Persons” Under IRC 351

The term persons for the purpose of IRC Code 351 can be:

  • Individuals
  • Trusts
  • Estates
  • Partnerships 
  • Associations
  • Companies
  • Corporations 

“Property” Under IRC 351

Property for the purposes of Section 351 IRC can be either tangible property or intangible property.

IRS Section 351 Takeaways 

So, what is IRC Code § 351?

What is the IRC 351 rule?

Typically, when a person transfers property to a corporation, the transaction will be a taxable transaction.

As a result, the person transferring will need to report the capital gains or losses on the property for that fiscal year.

However, under Section 351 of IRC, you can have a property transfer that may qualify for nonrecognition treatment allowing you to defer the transfer gains or losses to the future.

You can get the Sec 351 IRC nonrecognition treatment if:

  • One or more persons transfer property to a corporation 
  • The property is transferred “solely” in exchange for the corporation’s stock (such as common stocks and preferred stocks)
  • Right after the transfer, the person or persons (transfer group) must control the corporation 

I hope I was able to explain to you what IRC 351 means and how it works.

Keep in mind that understanding the Internal Revenue Code and the transfer rule under Sec 351 of IRC may require that you consult with a tax attorney or tax professional.

This article is intended to give you a general perspective on the statutory requirements for Section 351 transfers.

Let’s look at a summary of our findings.

Understanding IRC 351

  • The general tax rule that applies to property transfers to a corporation is that the transfer is a taxable event 
  • However, under IRS 351, a property transfer to a corporation will not be a taxable event in the same fiscal year if it meets the statutory requirements
  • If you transfer property to a corporation, you solely get the corporation’s stock for your property, and immediately after the transfer you control the corporation, you qualify 
Transferee definition 
Transferor definition
What are nonqualified preferred stocks
What are stock rights
What is a corporation 
What is common shares
What is intangible property
What is investment company 
What is loss carryover 
What is non-voting shares 
What is preferred shares
What is tangible property
What is voting shares
Author
IRC 1001
IRC 1017
IRC 1202
IRC 108
IRC 162
IRC 168
IRC 199a
IRC 2018
IRC 263
IRC 267
IRC 368
IRC 61
IRC 61
IRC 965
Author

Editorial Staffhttps://lawyer.zone
Hello Nation! I'm a lawyer and passionate about law. I've practiced law in a boutique law firm, worked in a multi-national organization and as in-house counsel. I've been around the block! On this blog, I provide you with golden nuggets of information about lawyers, attorneys, the law and legal theories. Enjoy!

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