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Three individuals, R, S, and T. currently own RST Corporation. The corporation has a net worth of $750,000 and has 500 shares (1,000 shares authorized) of common stock outstanding. R owns 200 shares (40 percent) and S and T each own 150 shares (30 percent). Individual E owns land worth $90,000, which the corporation could use as a new plant site. However, E is not interested in selling the land now because it would result in a large capital gain tax. E is willing to transfer the land to the corporation in exchange for 60 shares of its common stock, but only if the transfer will be nontaxable. Unfortunately, E’s transfer of land for 60 shares of stock will not qualify for Sec. 351 treatment. [See Reg. Sec. 1.351-1(a)]

R, S, and T have been advised that if they transfer cash to the corporation at the same time as E transfers his land, the transferor group will include R, S, T, and E and therefore they will own substantially all of RST Corporation and Sec. 351 will apply to E’s transfer. 


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1.)    If R, S, and T transfer a total of $10,000 ($4,000 from R and $3,000 each from S and T) will the transfer of E’s land qualify under Sec. 351?

2.)    If not, how much must R, S, and T transfer in order for E to receive Sec. 351 treatment?


            IfR, S, and T transfer a total of $10,000 to RST Corporation at the same time of the transfer of E’s land to the same Corporation, E’s land will not qualify under sec 351.


            Section 351(a) states that no tax gains or losses 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, if such a person(s) is/are in control of the corporation [Sec.351 (a)]. However, if the person transferring the property receives, in addition to the stock permitted to be received, other property or money, then-

  • a gain to such receipt shall be recognized, but not in excess of the amount of money received plus the fair market value of such other property received; and
  • no loss to such recipient shall be recognized [Sec.351 (b) (1)].

In E’s land transfer case, E does not receive any other property or money, in addition to the 60 shares previously agreed in exchange for the land. Since the exchange of E’s land with 60 shares of RST Corporation did not qualify the land transfer for section 351(a), then the concurrent transfer of R, T, and S money and E’s land to the Corporation will not make E’s land transfer to qualify.

Transfer to corporation controlled by the transferor

The general rule under section 351(a) provides that no tax gains or losses will be recognized upon transfer of a property solely in exchange for stock in such a corporation, if immediately after the exchange, such a person(s) is/are in control of the corporation to which, the property was transferred [Reg.Sec.1.351-1(a)(1)]. Control means acquiring at least 80 percent of the total voting rights of all classes of shares with voting rights, and at least 80 percent of all other classes of shares of such corporation [Reg.Sec.1.351-1(a)(1)].

 E’s land transfer would only qualify if, in exchange of the land, E gains immediate control of RTS Corporation: E owns at least 80 percent of total voting power of all classes of stock, which are entitled to vote, and at least 80 percent of total number of shares owned by RST Corporation [Reg.Sec.1.351-1(a)(1)]. It is clear that the transfer of 60 shares do not allow E to gain immediate control for RST Corporation. Therefore, the transfer of E’s land to RTS Corporation does not meet the general rule of section 351(a) hence do not qualify.

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However, the value of 60 shares offered to E in exchange of the land is not clear. In order for the transfer to qualify under section 351(a), RST Corporation should give to E, amount of stock, which gives him control of RST Corporation immediately after the exchange. Otherwise, R, S, and T can transfer, in addition to the 60 RST corporation shares, an amount of money, which when combined with the value of shares offered to E; do not result into a gain. This way, the loss arising from the transfer will not be recognized, hence no tax implications on the side of E.

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