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LESSON 3

ORGANIZATION OF A CORPORATION:

SECTION 351 and RELATED PROBLEMS

3A  Requirements of § 351 Nonrecognition

GENERAL COMMENTS: This is an introductory lesson intended to teach the basic principles before diving into the mechanics of § 351 transactions. Therefore, many of the same issues are covered in Lesson 3B. Note that while the fiscal year, the accounting method, and other tax decisions that must be made upon incorporation are not discussed here, you may cover these topics in the lesson.

(1)  The transfer is a sale or disposition under § 1001. A will realize $100 in amount and $50 in gain and will recognize the gain “except as otherwise provided in this subtitle,” because the general rule of the Code is that transfers for value are subject to tax. X will take a § 1012 cost basis so that the $50 gain inherent in the land in A’s hands cannot again be taxed. If X exchanges its stock, that stock is property the fair market value of which normally is realized by the recipient under § 1001(b), and X still gets a cost basis of $100 in the land. Section 351 “otherwise provides” if various conditions to be studied herein are met, with the result that A does not recognize the realized gain and X takes a carryover basis in the land. Conceptually, this rule seems to have been adopted in part to facilitate the incorporation of assets without recognition of gain (thus, normally benefiting the transferor) or loss (thus, normally benefiting the government), and in recognition of the feeling that somehow A has not “cashed in” because A’s interest in the land continues in the form of A’s stock. Compare § 721. B&E ¶ 3.01.