Chapter 1 Part 1 Flashcards
What is Section 351?
No G/L shall be recognized if property is transferred to a Corp for stock in that Corp if immediately after the exchange such person is in control (369(c))of the Corp.
How Does Section 369(c) define Control?
a. At least 80% of voting power &
b. Ownership of at least 80% of all other classes of Corp stock.
What if many shhs combine to form a Corp?
a. Section 351 can apply to a transaction with more than one shh.
b. EX: If 5 shhs each transfer property for Corp stock, Section 351 still applies.
c. Section 351 applies if one or more persons transfers property solely for stock, and if immediately after the exchange such person or persons are in control of the corporation.
• 1+ persons must transfer property,
• All must receive stock,
• group of persons who transfer property and receive stock in that transaction must be in control of the corporation immediately after the exchange.
What other gain recognition provisions does Section 351 override?
A) Section 1245 says that if recaptured property is disposed of, the recapture shall be recognized notwithstanding any other provision of this subtitle.
o Exception for 351, and other non-recognition provisions, Section 1245(b)(3) says that GAIN taken into account by the transfer, or Section (a)(1), shall not exceed the GAIN recognized determined without regard to this section & transactions including Section 351 exchanges.
B) INSTALLMENT OBLIGATION: Section 351 Exception (Regulations)
o Section 453(B) is similar and suggests that if an installment obligation is disposed of in any way G/L shall result as if the obligation were sold for FMV.
o Under Regs 1.453-9 there are exceptions to the recognition of G/L and that one is transfers to Corp under Section 351.
o If this regulation applies, Section 351 overrides Section 453(B).
What if the shh transfers in 2 assets & receives property or receives stock for that property?
If Section 351 applies, the result is still very simple and the shh takes the same basis in the stock that she had in the 2 properties that she transferred in.
If she transferred in one property with a basis of $3 and one with a basis of $7, her total basis in the stock is now $10. That builds into the stock, the GAIN that was not recognized on either of the assets at the time of the Section 351 exchange.
How long is shh deemed to have held the stock received in this transaction?
Property (not Capital Asset) = Same as property Exchanged
Capital Asset = Tacked holding period
What happens to shhs holding period if she transfers in more than one asset for stock?
The holding period is taken in part from each asset transferred in according to their relative FMV.
If shh A transfers in Asset #1 - ordinary income & Asset #2 - capital asset:
• Ordinary Income Property (value = 10)
o 10/30th of holding period tacked from inventory (start from zero)
• Capital Asset (value = 20)
o 20/30th tacked from land (land is 2/3 of total FMV of assets)
What is Section 358?
Defines the basis of the transferred property in a 351 exchange
What is Section 1223
Defines the holding period the transferred property in a 351 exchange.
