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Partially Taxable Exchange (Section 351(b))
Section 351(a) and Section 351(b)
To avoid any confusion over two sections of the Internal Revenue Code that deal with property transferred into a corporation in exchange for stock, note the following:
- Section 351(a) covers tax-free exchanges
- Section 351(b) covers partially taxable exchanges.
1) Section 351(a)-Tax-Free Exchange
Under Section 351(a), no gain or loss is recognized on an exchange of property for stock provided the following two conditions are met:
- You (or you and and others in your transferor group) do NOT receive property from the corporation in ADDITION to its stock, AND
- You (or you and others in your transferor group) CONTROL the corporation immediately after the exchange.
- Control is defined as owning at least 80% of all the stock immediately after the exchange.
- Section 368(c) defines control.
2) Section 351(b)-Partially Taxable Exchange
Under Section 351(b), if you own at least 80% of the stock immediately after the exchange and you receive boot in addition to stock, you must recognize gain (if any) up to amount of boot received
Boot:
Boot is money and the fair market value of other property you receive in addition to the stock you receive in an exchange for your property.
Losses:
No loss is recognized when you own more than 50% of the stock.
Services:
If you provide services to the corporation, your stock basis is increased by the fair market value of the services rendered.
Next:
C-corporations: Example of a Partially Taxable Exchange
Related Links
- The Incorporation Process
- Types of Corporations
- Taking Money Out of a Corporation
- Advantages of a Corporation
- Disadvantages of a Corporation
- Transferring Property Into a Corporation
- Documents Used to Transfer Property Into a Corporation
- Leasing and Licensing Property to a Corporation
- Opening a Corporate Bank Account
- Valuation of Property Transferred Into a Corporation
- Section 351(a)-Tax-Free Exchange
- Section 351(b)-Partially Taxable Exchange
- Section 1244 Losses on Small Business Stock
- Who May Claim an Ordinary Loss on Section 1244 Stock?
- Deduction Limit for Section 1244 Stock
- Sole Proprietorships
- Partnerships
- S-corporations
- Limited Liability Company
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