Sec

Sec. 351. Transfer to corporation controlled by transferor

    (a) General rule

      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 (as defined in section 368(c)) of the

    corporation.

Sections 351(a), 358(a)(1) Ex.1, 362(a), 1223(1) & (2)

Assumptions: Together, A, B and C own 100% of Newco. more than the 80% required for purposes of satisfying the §368(c) definition of control.

Treatment: No gain or loss is recognized by A, B or C. §351(a). A, B and C have bases in their stock of 30, 90 and 20, respectively, equal to the bases of assets transferred by each. §358(a)(1). Newco has carryover bases of 30, 90 and 20, respectively, in the land, cash and equipment. §362(a).

The holding periods of the stock and Newco's assets includes the holding periods of the assets transferred by A, B and C.

    (b) Receipt of property

      If subsection (a) would apply to an exchange but for the fact

    that there is received, in addition to the stock permitted to be

    received under subsection (a), other property or money, then -

        (1) gain (if any) to such recipient shall be recognized, but

      not in excess of -

          (A) the amount of money received, plus

          (B) the fair market value of such other property received;

and

        (2) no loss to such recipient shall be recognized.

Sections 351(b), 358(a)(1) Ex. 2, (a)(2) Ex. 1

Treatment: §351(a) would apply to both A and B but for the receipt of boot. So, gain is recognized, but only to the extent of the FMV of boot received. A has recognized gain of 40, the lesser of A's realized gain of 60 and the 40 FMV of boot received by A. B has recognized gain of 35, the lesser of B's realized gain of 35 and the 50 FMV of boot received by B (30 cash plus 20 FMV of IBM stock). A and B have bases in their stock of 30 and 70, respectively. §358(a)(1). For A: 30 basis in land transferred plus 40 gain recognized less 40 FMV of boot received. For B: 85 basis in land transferred plus 35 gain recognized less 50 FMV of boot received. B has a basis of 20 (i.e., FMV) in the IBM stock. §358(a)(2).

Sections 351(b)(2), 358(a)(1) Ex. 3, (a)(2) Ex. 2

Treatment: §351(a) would apply to both A and B but for the receipt of boot. So, A will recognize gain, the lesser of A's realized gain of 60 and the 40 FMV of boot received by A. §351(b)(1). A will have a basis of 30 in the stock: land AB of 30 plus 40 gain recognized less 40 boot received. B will not recognize any of B's realized loss of 65 ((70 + 30 + 20) - 185) due to §351(b)(2). B's basis in the X stock will be 135, land AB of 185 less the 30 cash received and 20 FMV of IBM stock received. §358(a)(1). B has no basis adjustment for gain or loss recognized - there was none. B's basis in the IBM stock will be its FMV of 20. §358(a)(2).

    (c) Special rules where distribution to shareholders

      (1) In general

        In determining control for purposes of this section, the fact

      that any corporate transferor distributes part or all of the

      stock in the corporation which it receives in the exchange to its

      shareholders shall not be taken into account.

Section 351(c)(1)

Treatment: The transfer of property by X and C to Newco qualify under §351(a). Control is achieved because while X technically retains no Newco stock, X's distribution of this stock to its shareholders is not taken into consideration for purposes of determining control. §351(c)(1). Accordingly, X and Y have 100% control of Newco.

      (2) Special rule for section 355

        If the requirements of section 355 (or so much of section 356

      as relates to section 355) are met with respect to a distribution

      described in paragraph (1), then, solely for purposes of

      determining the tax treatment of the transfers of property to the

      controlled corporation by the distributing corporation, the fact

      that the shareholders of the distributing corporation dispose of

      part or all of the distributed stock, or the fact that the

      corporation whose stock was distributed issues additional stock,

      shall not be taken into account in determining control for

      purposes of this section.

Section 351(c)(2) Ex. 1

Treatment: If the transaction qualifies as a tax-free division under §355, the fact that A and B dispose of their Newco stock (in a tax-free B reorganization) will not defeat a determination that P, a transferor of property, controls Newco, a transferee of property, for purposes of §351(a).

OPEN

Section 351(c)(2) Ex. 2

Treatment: If the transaction qualifies as a tax-free division under §355, Newco's issuance of additional stock (100 shares) to the public is ignored for purposes of determining whether P controls Newco, satisfying §351(a). P's distribution of Newco stock to A and B is likewise ignored. §351(c)(1). Accordingly, P does control Newco for purposes of §351(a).

    (d) Services, certain indebtedness, and accrued interest not

        treated as property

      For purposes of this section, stock issued for -

        (1) services,

        (2) indebtedness of the transferee corporation which is not

      evidenced by a security, or

        (3) interest on indebtedness of the transferee corporation

      which accrued on or after the beginning of the transferor's

      holding period for the debt,

    shall not be considered as issued in return for property.

Section 351(d)

Assumptions: Of the accrued interest on the long-term note held by C, 12 accrued after C acquired the note and 8 before. The note's FMV of 100 includes this 20 of accrued interest.

Treatment: The services transferred by A, the accounts receivable owed by X to B, and 12 of the accrued interest on the X note held by C are not considered property for purposes of §351. §§351(d)(1), (2), and (3), respectively. Accordingly, while A, B and C are all considered transferors of property by virtue of the remaining consideration that each transfers, and therefore V351(b) applies, receipt of stock for the services, the accounts receivable and 12 of the accrued interest is considered to be boot.

    (e) Exceptions

      This section shall not apply to -

      (1) Transfer of property to an investment company

        A transfer of property to an investment company.  For purposes

      of the preceding sentence, the determination of whether a company

      is an investment company shall be made -

          (A) by taking into account all stock and securities held by

        the company, and

          (B) by treating as stock and securities -

            (i) money,

            (ii) stocks and other equity interests in a corporation,

          evidences of indebtedness, options, forward or futures

          contracts, notional principal contracts and derivatives,

            (iii) any foreign currency,

            (iv) any interest in a real estate investment trust, a

          common trust fund, a regulated investment company, a

          publicly-traded partnership (as defined in section 7704(b))

          or any other equity interest (other than in a corporation)

          which pursuant to its terms or any other arrangement is

          readily convertible into, or exchangeable for, any asset

          described in any preceding clause, this clause or clause (v)

          or (viii),

            (v) except to the extent provided in regulations prescribed

          by the Secretary, any interest in a precious metal, unless

          such metal is used or held in the active conduct of a trade

          or business after the contribution,

Section 351(e)(1)(B)(v)

Assumptions: Newco will operate a jewelry manufacturing business, using the contributed gold and silver in the manufacturing process.

Treatment: Newco will not be an investment company and, therefore, §351 will apply to A and B's transfers. For purposes of determining whether an investment company exists, cash is considered, "stock or securities". But, precious metals are not considered, "stock or securities" if those metals are used by the company after the contribution (§351(e)(1)(B)(v)), as is the case here.

            (vi) except as otherwise provided in regulations prescribed

          by the Secretary, interests in any entity if substantially

          all of the assets of such entity consist (directly or

          indirectly) of any assets described in any preceding clause

          or clause (viii),

Section 351(e)(1)(B)(vi)

X is an investment company. While only 1000 of 2400 of the value of X assets is in the form of actual stock or securities, X's ownership interest in the T partnership will be treated as a stock or security because it is an entity and all of T's assets are treated as "stock or securities". §351(e)(1)(B)(vi). Accordingly, A and B's transfers are not pursuant to §351.

            (vii) to the extent provided in regulations prescribed by

          the Secretary, any interest in any entity not described in

          clause (vi), but only to the extent of the value of such

          interest that is attributable to assets listed in clauses (i)

          through (v) or clause (viii), or

            (viii) any other asset specified in regulations prescribed

          by the Secretary.

      The Secretary may prescribe regulations that, under appropriate

      circumstances, treat any asset described in clauses (i) through

      (v) as not so listed.

Section 351(e)(1)

Newco is an investment company and, therefore, §351 does not apply. §351(e)(1). Of the 500 FMV of assets held by Newco after the transfers, only 60, the land and equipment, is not considered, "stock or securities". Because 440/500 exceeds 80%, and because the shareholders have diversified their interests, Newco is an investment company.

      (2) Title 11 or similar case

        A transfer of property of a debtor pursuant to a plan while the

      debtor is under the jurisdiction of a court in a title 11 or

      similar case (within the meaning of section 368(a)(3)(A)), to the

      extent that the stock received in the exchange is used to satisfy

      the indebtedness of such debtor.

Section 351(e)(2)

Assumptions: X is in bankruptcy court and the transaction was executed pursuant to a plan under the jurisdiction of that court.

Treatment: X's transfer of assets to Newco in exchange for all of Newco's stock is not covered by §351. §351(e)(2). This result allows the transaction to be tested under §368(a)(1)(G) instead.

    (f) Treatment of controlled corporation

      If -

        (1) property is transferred to a corporation (hereinafter in

      this subsection referred to as the ''controlled corporation'') in

      an exchange with respect to which gain or loss is not recognized

      (in whole or in part) to the transferor under this section, and

        (2) such exchange is not in pursuance of a plan of

      reorganization,

    section 311 shall apply to any transfer in such exchange by the

    controlled corporation in the same manner as if such transfer were

    a distribution to which subpart A of part I applies.

Section 351(f)

Treatment: The transaction comes under §351(b). X recognizes the realized gain of 100 on the transfer of land to A in exchange for A's cash, but X does not recognize the realized loss of 50 on the transfer of equipment to B in exchange for B's cash. §351(f). X also does not recognize gain or loss on the transfer of its stock for cash from either A or B. §1032.

    (g) Nonqualified preferred stock not treated as stock

      (1) In general

        In the case of a person who transfers property to a corporation

      and receives nonqualified preferred stock -

          (A) subsection (a) shall not apply to such transferor, and

          (B) if (and only if) the transferor receives stock other than

        nonqualified preferred stock -

            (i) subsection (b) shall apply to such transferor; and

            (ii) such nonqualified preferred stock shall be treated as

          other property for purposes of applying subsection (b).

Section 351(g)(1) Ex. 1, (2)(A)(i)

Assumptions: B can require X to redeem the preferred shares in 5 years for 10.

Treatment: B has received nonqualified preferred stock. The preferred stock is nonqualified because B can require X to redeem it. §351(g)(2)(A)(i). Accordingly, that stock is treated as boot. B will recognize gain of 10, the lesser of B's realized gain of 15 or the boot of 10. §351(g)(1)(B). A does not recognize gain. §351(a).

Sections 351(g)(1) Ex. 2, (2)(A)(ii), (3)(B)

Assumptions: Y is required to redeem the X preferred stock in 7 years.

Treatment: The stock received by A is nonqualified preferred stock because a "related person" to X is required to redeem that preferred stock. §351(g)(2)(A)(ii). Y is related to X because they are members of the same controlled group. §§267(b)(3, (f)(1), 351(g)(3)(B), 1563(a). Because A received only this nonqualified preferred stock from X, neither §§351(a) nor (b) apply and A recognizes the entire realized gain of 30. §351(g)(1)(A).

Section 351(g)(1) Ex. 3

Assumptions: Newco is required to redeem A's preferred stock in 5 years.

Treatment: A's preferred stock is nonqualified because Newco is required to redeem that stock. §351(g)(2)(A)(ii). Because A has received just this nonqualified stock, §§351(a) and (b) do not apply to A, and A is therefore required to recognize the realized gain of 15. §351(a) applies to B because the transferors of property, A and B, own 100% of Newco following the transfers. The preferred stock is treated as nonqualified for purposes of determining the application of §§351(a) and (b) to the recipient of the preferred stock, but that preferred stock is otherwise treated as stock.

      (2) Nonqualified preferred stock

        For purposes of paragraph (1) -

        (A) In general

          The term ''nonqualified preferred stock'' means preferred

        stock if -

            (i) the holder of such stock has the right to require the

          issuer or a related person to redeem or purchase the stock,

Section 351(g)(1) Ex. 1, (2)(A)(i)

Assumptions: B can require X to redeem the preferred shares in 5 years for 10.

            (ii) the issuer or a related person is required to redeem

          or purchase such stock,

Sections 351(g)(1) Ex. 2, (2)(A)(ii), (3)(B)

Assumptions: Y is required to redeem the X preferred stock in 7 years.

            (iii) the issuer or a related person has the right to

          redeem or purchase the stock and, as of the issue date, it is

          more likely than not that such right will be exercised, or

Section 351(g)(2)(A)(iii)

Assumptions: The Class A preferred will pay an annual dividend of 6% (which rate is reasonable for a company such as Newco). Newco can redeem the stock for 1.20/share. The Class B preferred wil pay an annual dividend of 6% for the first 5 years, 12% thereafter. After 5 years, Newco can redeem the stock at 1/share.

Treatment: The Class A preferred is not nonqualified because, even though Newco has the right to redeem, it is not more likely than not that it will do so. §351(g)(2)(A)(iii). The Class B preferred is nonqualified because, even though Newco has the right to redeem, it is not more likely than not that it will do so. §351(g)(2)(A)(iii). The Class B preferred is nonqualified because the doubling of the dividend rate in 5 years together with the reasonable redemption price of 1/share makes redemption more likely than not.

            (iv) the dividend rate on such stock varies in whole or in

          part (directly or indirectly) with reference to interest

          rates, commodity prices, or other similar indices.

Section 351(g)(2)(A)(iv)

Assumptions: The Class A preferred pays a dividend every quarter equal to the average prime rate for the quarter plus 2%. The Class B preferred pays a dividend every quarter equal to any net positive increase in the price of a barrel of crude oil for the quarter. Class C preferred pays a quarterly dividend equal to 1.75%. All of the preferred classes can be (but need not be) redeemed by Newco for 120% of their face amount.

Treatment: Classes A and B preferred are nonqualified while Class C is not. Class A is nonqualified because it has a dividend rate which varies based on interest rates. Class B is nonqualified because its dividend rate is a function of commodity prices (hence, its value moves more like the commodity than preferred stock). Class C is garden variety preferred.

        (B) Limitations

          Clauses (i), (ii), and (iii) of subparagraph (A) shall apply

        only if the right or obligation referred to therein may be

        exercised within the 20-year period beginning on the issue date

        of such stock and such right or obligation is not subject to a

        contingency which, as of the issue date, makes remote the

        likelihood of the redemption or purchase.

Section 351(g)(2)(B) Ex. 1

Assumptions: The preferred stock provides an annual dividend of 7% (a rate reasonable for a company such as Newco). After 25 years, Newco is required to redeem the preferred stock.

Treatment: While a requirement that the issuer (or a related person) redeem preferred stock normally taints the stock as nonqualified (§351(g)(2)(A)(ii)) this is not so for an obligation exercised more than 20 years from issuance. §351(g)(2)(B).

Section 351(g)(2)(B) Ex. 2

Assumptions: The terms of the preferred stock allows A to require Newco to redeem the stock if the rate of inflation exceeds 25% measured over any 2 consecutive year period, a possibility that is remote.

Treatment: The preferred stock is not nonqualified because, while A can require Newco to redeem the stock, such obligation is subject to a contingency which makes the likelihood of redemption remote. §351(g)(2)(B).

        (C) Exceptions for certain rights or obligations

          (i) In general

            A right or obligation shall not be treated as described in

          clause (i), (ii), or (iii) of subparagraph (A) if -

              (I) it may be exercised only upon the death, disability,

            or mental incompetency of the holder, or

Section 351(g)(2)(C)(i)(I)

Assumptions: A (or A's estate) can require Newco to redeem the preferred stock, but only if A dies, or becomes disabled or incompetent.

Treatment: While the provision that A can require Newco to redeem the preferred stock would generally make that stock nonqualified (§351(g)(2)(A)(i)), an exception applies because A can exercise that requirement only upon A's death, disability or incompetence. §351(g)(2)(C)(i)(I).

              (II) in the case of a right or obligation to redeem or

            purchase stock transferred in connection with the

            performance of services for the issuer or a related person

            (and which represents reasonable compensation), it may be

            exercised only upon the holder's separation from service

            from the issuer or a related person.

          (ii) Exception

            Clause (i)(I) shall not apply if the stock relinquished in

          the exchange, or the stock acquired in the exchange is in -

              (I) a corporation if any class of stock in such

            corporation or a related party is readily tradable on an

            established securities market or otherwise, or

Section 351(g)(2)(C)(ii)(I)

Assumptions: A is 70 years old. A (or A's estate) can require Newco to purchase the preferred stock for 35 if A dies or becomes disabled or incompetent, a possibility that has more than a remote chance of occurring.

Treatment: The Newco preferred stock issued to A is nonqualified. The holder has the right to require the issuer to redeem the stock - that stock would therefore generally be nonqualified. §351(g)(2)(A)(i). While §351(g)(2)(C)(i)(I) provides an exception if the right can only be exercised upon death, disability or incompetency, §351(g)(2)(C)(ii)(I) provides an exception to that exception where the stock acquired is in a corporation if any class of stock in such corporation (Newco) or a related party (P) is readily tradable, as is true here.

              (II) any other corporation if such exchange is part of a

            transaction or series of transactions in which such

            corporation is to become a corporation described in

            subclause (I).

Section 351(g)(2)(C)(ii)(II)

Treatment: The Newco preferred stock issued to A is nonqualified. The holder has the right to require the issuer to redeem the stock - that stock would therefore generally be nonqualified. §351(g)(2)(A)(i). While §351(g)(2)(C)(i)(I) provides an exception if the right can only be exercised upon death, disability or incompetency, §351(g)(2)(C)(ii)(II) provides an exception to that exception where the stock is acquired in a corporation as part of a transaction or series of transactions where such corporation will have a class of stock that is readily tradable.

      (3) Definitions

        For purposes of this subsection -

        (A) Preferred stock

          The term ''preferred stock'' means stock which is limited and

        preferred as to dividends and does not participate in corporate

        growth to any significant extent.  Stock shall not be treated

        as participating in corporate growth to any significant extent

        unless there is a real and meaningful likelihood of the

        shareholder actually participating in the earnings and growth

        of the corporation.  If there is not a real and meaningful likelihood

        that dividends beyond any limitation or preference will actually be

        paid, the possibility of such payments will be disregarded in

        determining whether stock is limited and preferred as to dividends.

Section 351(g)(3)(A)

Assumptions: Both classes of preferred are to be redeemed in 10 years. Class A preferred is garden variety preferred: limited and preferred as to dividends which are set a flat rate. Class B preferred has a dividend which is currently set at the rate of the Class A but will increase in proportion to the increase in dividends attributable to the common shares, an event which is deemed likely to happen.

Treatment: The Class A preferred is nonqualified preferred stock. The Class B preferred is not. Only "preferred stock" can be nonqualified preferred stock, and the term "preferred stock" is defined to exclude stock that participates in corproate growth to any significant extent. §351(g)(3)(A).

        (B) Related person

          A person shall be treated as related to another person if

        they bear a relationship to such other person described in

        section 267(b) or 707(b).

Sections 351(g)(1) Ex. 2, (2)(A)(ii), (3)(B)

Assumptions: Y is required to redeem the X preferred stock in 7 years.

      (4) Regulations

        The Secretary may prescribe such regulations as may be

      necessary or appropriate to carry out the purposes of this

      subsection and sections 354(a)(2)(C), 355(a)(3)(D), and 356(e).

      The Secretary may also prescribe regulations, consistent with the

      treatment under this subsection and such sections, for the

      treatment of nonqualified preferred stock under other provisions

      of this title.

    (h) Cross references

          (1) For special rule where another party to the exchange

        assumes a liability, (FOOTNOTE 1) see section 357.

       (FOOTNOTE 1) So in original.  Probably should be followed by a

    comma.

          (2) For the basis of stock or property received in an

        exchange to which this section applies, see sections 358 and

        362.

          (3) For special rule in the case of an exchange described in

        this section but which results in a gift, see section 2501 and

        following.

          (4) For special rule in the case of an exchange described in

        this section but which has the effect of the payment of

        compensation by the corporation or by a transferor, see section

        61(a)(1).

          (5) For coordination of this section with section 304, see

        section 304(b)(3).