Section 351

1899 Words Aug 31st, 2013 8 Pages
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
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In Rel. Rul. 2003-51, there provides a successful example of Section 351 exchange that the transferor transfers property to a corporation in exchange stock and immediately after the transferor meets the requirement of in control of the corporation and involves the issue of the “pursuant to a binding agreement” with a third party before the exchange. Corporation W engages in businesses A, B, C. Another unrelated Corporation to W that is called Corporation X also engages in business A through X’s wholly owned domestic subsidiary, Y. At the same time, W and X wants to consolidated their business and form a new corporation from their operations in business A. In order to reach this goal and pursuant to a prearranged binding agreement, W then forms a Corporation called Z and transfers all of the assets from business A to Z to exchange Z’s stock that is their first transfer. Immediately thereafter, W transfers all of its Z stock to Y in order to exchange Y’s stock that is their second transfer. X then transfers $30x to Y to meet business A’s capital needs simultaneously that is the third transfer. After that, Y transfers the $30x from X and its assets from business A to Z that is the fourth transfer. W and X can own 40 percent and 60 percent outstanding stocks in Y after second and third transfers. Each of the first transfer, the combined second and third transfers and the fourth transfer qualifies to be Section 351 transaction. In the “Analysis” of Rel.

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