Don't overlook these!
Updated for 2012
Two requirements must be met to qualify for tax-free treatment under Section 351(a):
Nonqualified Preferred Stock: This is stock in which the holder of the stock has the right to require the issuer to redeem or buy it back or the issuer is required to redeem or buy it back. Also, the dividend rate on such stock varies with reference to interest rates, commodity prices, or similar indices.
For a detailed definition of nonqualified preferred stock see IRC Section 351(g)(2).
No gain or loss shall be recognized if -
The second rule for getting tax-free treatment in an exchange is the extent of your control (or the control of you and others in the transferor group) after the exchange.
What is meant by control?
Section 368(c) defines control:
Control means the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of outstanding shares of all other classes of stock of the corporation.
The control requirement applies to both tax-free and partially taxable exchanges.
Attach a statement to your tax return. Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax return a complete statement of all facts pertinent to the exchange.
For more information, see section 1.351-3 of the regulations.
Partially taxable exchanges: Another section under Section 351 applies to partially taxable exchanges. It is Section 351(b).
C corporations: Valuation of Property and Stock in an Exchange
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