Partially Taxable Exchange (Section 351(b))

Section 351(a) and Section 351(b)

To avoid any confusion over two particular 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.

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.

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 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.

No loss is recognized when you own more than 50% of the stock. If you provide services to the corporation, your stock basis is increased by the fair market value of the services rendered.

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