Corporate Tax

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351 General Requirements

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1. One or more persons (including individuals, corporations, partnerships and others) must transfer "property" to a corporation;
2. Solely in exchange for "stock" of the transferee corporation; and
3. The transferors, as a group, must be in "control" (as defined in 368(c)) of corporation "immediately after the exchange."

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351 "Property"

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1. Property includes cash, inventory, accounts receivable, patents and other intangibles such as goodwill and industrial know-how.
2. Under 351(d)(1) and 1.351-1(a)(1)(i), stock issued for past, present or future services rendered to Newco is not for "property."
3. The performance of services may result in creating an intangible right that qualifies as 351 property (e.g., a contract to develop real estate).

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351 "Transfer"

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1. All substantial rights in the property must be transferred to Newco.
2. A limited license of property (e.g., a nonexclusive license to use technology) does not satisfy this requirement, and any stock received for this license is considered royalty income.
3. In Du Pont de Nemours & Co., a court held the requirement is met if stock is issued for a perpetual nonexclusive license.

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351 Solely in Exchange for "Stock"

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1. Under 1.351-1(a)(1), "stock" represents an equity ownership interest in a corporation; it does not include stock rights, warrants, or convertible debt securities.
2. Any corporate interest received by a transferor of property from Newco that is not "stock" is treated as "other property" (AKA "boot").

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351 Solely in Exchange for "Stock" - Nonqualified Preferred Stock

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1. Under 351(g)(1), nonqualified preferred stock is treated as "other property" rather than stock for 351 purposes.
2. Nonqualified preferred stock is preferred stock (i.e., stock that is limited and preferred as to dividends and does not participate in corporate growth to any significant extent) with any of the debt-like characteristics found in 351(g)(2)(A).
3. Nonqualified preferred stock is still treated as stock for the control test under 368(c).

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351 "Control"

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Under 368(c), the transferors of property collectively must own at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of each class of nonvoting stock.

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351 Simultaneous Exchanges

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Under 1.351-1(a)(1), simultaneous exchanges are not required where the rights of the parties have been "previously defined" and the agreement proceeds with an "expedition consistent with orderly procedure."

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351 "Immediately After the Exchange"

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1. When a member of the transferor control group disposes of stock shortly after an incorporation exchange, an issue arises as to whether the control test should apply before or after the disposition.
2. This requires application of the judicially created "Step Transaction Doctrine."

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351 "Immediately After the Exchange" - Binding Agreements to Dispose of Stock In Taxable Transaction

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1. If in a taxable transaction a shareholder disposes of stock received in exchange for property pursuant to a prearranged binding agreement entered into prior to an incorporation exchange, the control test is applied after the stock disposition.
2. If non prearranged binding agreement, then no loss of control unless the original transfers to Newco and the subsequent disposition of Newco stock were "mutually interdependent" - i.e., the legal relations created by the first step would have been fruitless without completion of all the steps. (See American Bantam Car Co.).

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351 "Immediately After the Exchange" - Binding Agreements to Dispose of Stock In Nontaxable Transaction

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1. Under Revenue Ruling 2003-51, the control element is not violated even though, pursuant to a prearranged binding agreement, the transferor technically loses control after the transfer from Newco by immediately transferring all of Newco's stock to Oldco.
2. It must involve another corporation already engaged in the same line of business who is engaging in a separate tax free 351 exchange.
3. This creates a holding company structure. (See illustration in notes).

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351 "Immediately After the Exchange" - Voluntary Donative Dispositions of Stock

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1. A voluntary disposition of stock (i.e., a gift) after an otherwise qualified 351 transfer will not cause the transaction to fail the control requirement. (Wilgard Realty Co.).
2. The result is likely the same even if Newco issues the stock directly to the transferor's donee (D'Angelo Associates, Inc.).

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351 "Immediately After the Exchange" - Corporate Transferors

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Under 351(c), when determining control, the fact that a corporate transferor distributes part or all of the Newco stock that it receives to its shareholders is not taken into account.