Yen-Hui Chen
Professor Steven J. Mandelkorn
Accounting 757
05/20/2013
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 stock but we need to be careful for the non-qualified preferred stock that is not treated as stock. Three, the property transferors have to be in control of the transferee’s corporation immediately after the exchange. There is a specific requirement for the term “control” here that the transferor who is transferring the property must have 80 percent stock ownership in the transferee corporation. There is a detailed description about the requirement and meaning of “in control of” in Section 368(c), “the term “control” means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.” On the other hand, we have to be careful that if there are other transferors or individuals ask for the stock that is more than 20 % of the stock in the transferee corporation, we will not meet the requirement in Section 351. However, if there are more than two individuals want to take advantage from Section 351 to qualify for tax-free transfer, they can make an agreement with each other