Frequently Asked Questions
Who is eligible for the Tax-Free Transfer to Controlled Corporation?
One or more persons must transfer property solely for stock and maintain control (80% voting/value) immediately after the exchange.
How does the Tax-Free Transfer to Controlled Corporation work?
Allows taxpayers to transfer property to a corporation in exchange for stock without recognizing gain or loss, provided the transferors control at least 80% of the corporation immediately after.
What law authorizes the Tax-Free Transfer to Controlled Corporation?
The Tax-Free Transfer to Controlled Corporation is authorized under IRC §351 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §351
Source: Internal Revenue Code, Title 26, United States Code
§ 351. Transfer to corporation controlled by transferor(a) General ruleNo 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.
(b) Receipt of propertyIf subsection (a) would apply to an exchange but for the fact that there is received, in addition to the stock permitted to be received under subsection (a), other property or money, then—(1) gain (if any) to such recipient shall be recognized, but not in excess of—(A) the amount of money received, plus
(B) the fair market value of such other property received; and
(2) no loss to such recipient shall be recognized.
(c) Special rules where distribution to shareholders(1) In generalIn determining control for purposes of this section, the fact that any corporate transferor distributes part or all of the stock in the corporation which it receives in the exchange to its shareholders shall not be taken into account.
(2) Special rule for section 355If the requirements of section 355 (or so much of section 356 as relates to section 355) are met with respect to a distribution described in paragraph (1), then, solely for purposes of determining the tax treatment of the transfers of property to the controlled corporation by the distributing corporation, the fact that the shareholders of the distributing corporation dispose of part or all of the distributed stock, or the fact that the corporation whose stock was distributed issues additional stock, shall not be taken into account in determining control for purposes of this section.
(d) Services, certain indebtedness, and accrued interest not treated as propertyFor purposes of this section, stock issued for—(1) services,
(2) indebtedness of the transferee corporation which is not evidenced by a security, or
(3) interest on indebtedness of the transferee corporation which accrued on or after the beginning of the transferor’s holding period for the debt,
shall not be considered as issued in return for property.
(e) ExceptionsThis section shall not apply to—(1) Transfer of property to an investment companyA transfer of property to an investment company. For purposes of the preceding sentence, the determination of whether a company is an investment company shall be made—(A) by taking into account all stock and securities held by the company, and
(B) by treating as stock and securities—(i) money,
(ii) stocks and other equity interests in a corporation, evidences of indebtedness, options, forward or futures contracts, notional principal contracts and derivatives,
(iii) any foreign currency,
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