Section 351

1922 words 8 pages
Yen-Hui Chen
Professor Steven J. Mandelkorn
Accounting 757
Section 351 In Section 351(a), it states that “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.” If we want to make qualified and successful transactions under Section 351 in order to make tax free transaction as it will not recognized and gain or loss, we will have to meet and satisfied the three lawful requirements to qualify non-recognition of gain or loss under Section 351. First, there have to be a property transfer. Second, there must be in exchange for common stock or preferred
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However, since the first and second transfers are pursuant to the prearranged binding agreement, we have to be careful that the second transfer may cause the first transfer to be unable to reach the requirement in Section 351. Although there is a limitation in transactions to satisfy Section 351 requirement that “pursuant to a binding agreement entered into by the transferor prior to the transfer of property to the corporation in exchange for stock, the transferor loses control of the corporation by a taxable sale of all or part of that stock to a third party that does not also transfer property to the corporation in exchange for stock”, IRS still considered the first transaction that first transfer that W transfers all of the assets from business A to Z to exchange Z’s stock as a qualified Section 351 transaction since it “followed by a nontaxable disposition of the stock received as a transfer described in Section 351 is not necessarily inconsistent with the purposes of Section 351.” As a result, even if there is a issue about “pursuant to a binding agreement entered into by the transferor with a third party prior to the exchange” between W and X for the first transfer and second transfer, since after all of these transfers, the transferor W and the third party X are in control of Z Corporation, all of the transfers are considered as


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