PORTFOLIO

Transfers to Controlled Corporations: General (Portfolio 758)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. This portfolio discusses the tax considerations of transferring property to corporations controlled by the transferors. 

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DESCRIPTION

Transfers to Controlled Corporations: In General discusses the tax considerations of transferring property to corporations controlled by the transferors.

 

 

 

Specifically, this Portfolio explains the basic requirements of a §351 exchange and analyzes the tax effects of: (1) a transferor's receipt of money or other property in addition to the stock of the transferee, (2) the transferor's provision of services in return for such stock, (3) the transferee's assumption of the transferor's liabilities (or acquisition of property from the transferor subject to a liability), and (4) the determination of the transferor's and transferee's basis and holding period for stock or property received by them.

 


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AUTHORS

Bloomberg BNA Portfolios are written by leading tax professionals who set the standard as leaders in their fields. The Transfers to Controlled Corporations: In General portfolio was authored by the following attorneys.  

 

HOWARD J. ROTHMAN

Howard J. Rothman obtained his J.D. from Brooklyn Law School and his LL.M. from New York University School of Law. He is a member of the American Bar Association, Section of Taxation, Committee on Corporate Tax, New York State Bar Association, Section of Taxation, Committee on Corporations, Committee on Partnerships, and Committee on Income from Real Property. He is also a  member of the International Bar Association, Committee on Taxation on the Advisory Board for the Tax Management Real Estate Journal and co-author of Tax Management Portfolio No. 561, Capital Assets and Tax Management Portfolio No. 758, Transfers to Controlled Corporations: In General.

 

 

Credentials /

 

Howard J. Rothman: B.A., City College of New York (1967); J.D., Brooklyn Law School (1971); LL.M., New York University School of Law (1972); member, American Bar Association, Section of Taxation, Committee on Corporate Tax; member, New York State Bar Association, Section of Taxation, Committee on Corporations, Committee on Partnerships, and Committee on Income from Real Property; member, International Bar Association, Committee on Taxation; Advisory Board, Tax Management Real Estate Journal; member, New York State Bar; co-author, Tax Management Portfolio No. 561, Capital Assets; and co-author, Tax Management Portfolio No. 758, Transfers to Controlled Corporations: In General.


PAMELA M. CAPPS

Pamela M. Capps obtained her J.D. from Columbia University School of Law. She is a member of the New York State Bar Association, Association of the Bar of the City of New York, and New York State Bar. Pamela is co-author of Tax Management Portfolio No. 561, Capital Assets and Tax Management Portfolio No. 758, Transfers to Controlled Corporations: In General.

 

Credentials / 

Pamela M. Capps: B.S.B.A., Washington University (1987); J.D., Columbia University School of Law (1992); member, New York State Bar Association, Association of the Bar of the City of New York; member, New York State Bar; co-author, Tax Management Portfolio No. 561, Capital Assets; and co-author, Tax Management Portfolio No. 758, Transfers to Controlled Corporations: In General.

 

 

 


BARRY HERZOG

Barry Herzog obtained his J.D. from  Columbia University. He is a  member of the New York State Bar Association, Committee on Corporations,  American Bar Association, Section of Taxation, and New York Bar. He is the co-author of Tax Management Portfolio No. 561, Capital Assets and Tax Management Portfolio No. 758, Transfers to Controlled Corporations: In General.

 

Credentials / 

Barry Herzog: B.A., Yeshiva University (1987); J.D., Columbia University (1991); member, New York State Bar Association, Committee on Corporations; member, American Bar Association, Section of Taxation; member, New York Bar; co-author, Tax Management Portfolio No. 561, Capital Assets; and co-author, Tax Management Portfolio No. 758, Transfers to Controlled Corporations: In General.

 

 

 


HELAYNE OBERMAN STOOPACK

Helayne Oberman Stoopack obtained a J.D. from Harvard Law School and is a member of the American Bar Association, New York State Bar Association, Association of the Bar of the City of New York, and New York State Bar.

 

Credentials / 

Helayne Oberman Stoopack: A.B., Brown University (1975); M.A., University of Michigan (1977); J.D., Harvard Law School (1981); member, American Bar Association, New York State Bar Association, Association of the Bar of the City of New York; member, New York State Bar.

 

 

 


TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Historical Development of § 351

III. Basic Requirements of § 351

A. Introductory Comments

B. The Property Requirement

1. Definition of "Property"

a. Money as Property

b. Intangible Rights Created by Personal Services (e.g., Patents, Trademarks) as Property

(1) In General

(2) Criteria for Qualification Under § 351

(a) Inherent Nature of the Consideration

(b) Legal Protection

(c) Ancillary and Subsidiary Services

(d) Transfer of All Substantial Rights

(3) Coordination with Other Code Sections

(a) Section 367

(b) Section 1221

(c) Section 197

(d) Section 263(a)

c. Transferee's Obligations as Property

(1) Pre-Bankruptcy Tax Act of 1980 Law

(2) Post-Bankruptcy Tax Act of 1980 Law

(a) Principal Balance of Transferee Corporation's Obligation

(b) Accrued Interest on Transferee Corporation's Obligation

d. Accounts Receivable as Property

e. Stock of a Corporation as Property

(1) Stock of a Transferor or Other Corporation

(2) Stock of a Transferee Corporation

f. Equitable Interests as Property

g. Unenforceable Contract Rights as Property

h. Miscellaneous Items as Property

2. The Issuance of Stock for Services

3. The Issuance of Stock for the Transferee Corporation's Debt

4. The Issuance of Stock for Market Discount Bonds

C. Requirement of a Transfer

1. Transfer Versus a Grant of Rights

a. The IRS's View

b. The Courts' View

2. To Whom Property Must Be Transferred

D. Transfer by One or More Persons - The Control Group Issue

1. General Rule

2. What Constitutes a Control Group?

a. No Need for Prior Relationship

b. No Requirement for Simultaneous Exchange

c. No Requirement for Receipt of Same Classes of Stock

d. Consequences of Control Group Status

3. How Large May the Control Group Be?

4. Existing Shareholder Included as Part of Control Group

a. Control Before Transaction

b. Accommodation Transferors

5. Disproportionate Distribution of Stock

a. In General

b. Realignment of Transferred Stock

c. Effect of Realignment on Control

E. The Definition of "Control"

1. In General

2. Stock Considered in Determining Control

a. Outstanding Stock

b. No Attribution of Constructively Owned Shares

c. Beneficial Stock Ownership

d. Nonqualified Preferred Stock

3. Issuance of Multiple Classes of Stock

4. Meaning of "Stock Entitled to Vote"

a. In General

b. Options, Rights, etc., as Stock Entitled to Vote

5. Meaning of "Total Combined Voting Power"

a. In General

b. Class of Voting Shares

c. Voting Agreements

d. Deferred or Contingent Voting Rights

e. Disproportionate Voting and Equity Interests

6. Control Before the Transfer of Property

7. Creditors Considered to Be in Control of Insolvent Corporation

8. Transferors in Community Property States

F. The "Immediately After the Exchange" Requirement

1. In General

2. The Step Transaction Doctrine - Overview

a. In General

(1) Intention of the Parties

(2) Time Interval Between the Transactions

(3) Mutual Interdependency of the Transactions

b. Requirement of a Binding Commitment

c. Functional Relationship Requirement

3. The Step Transaction Doctrine - Judicial Application to § 351

4. The Step Transaction Doctrine - The IRS's Position

5. Determination of Control Immediately After the Exchange - Specific Transactions

a. Sales of Transferee Corporation's Stock by Transferors

(1) Binding Commitment

(a) Judicial Decisions

(b) IRS Rulings

(2) Non-binding Commitment

b. Issuance of Additional Stock of Transferee Corporation

c. Underwriting of Transferee Corporation's Stock

(1) In General

(2) Case Law and IRS's Position Before Regs. § 1.351-1(a)(3)

(a) Case Law

(i) Underwriting Contract Executed After the Exchange

(ii) Underwriting Contract Entered into Before or Simultaneously with the Exchange

(b) The IRS's Position

(i) Best-Efforts Underwriting

(ii) Firm-Commitment Underwriting

d. Transfer of Transferee Corporation's Stock for Services Rendered

e. Gifts of Transferee Corporation's Stock

f. Options or Stock Subscriptions to Acquire Transferee Corporation's Stock

(1) Options

(2) Stock Subscriptions

g. Transfers of Transferee Corporation's Stock to Beneficiaries of Estates and Trusts

h. Voting Trust or Other Voting Agreements

6. Sales of Transferee Corporation Stock Among Transferors

7. Successive § 351 Transfers

8. Distributions of Transferee Corporation Stock by Transferors

a. Distributions by Corporate Transferors

b. Distributions by Noncorporate Transferors

(1) Distributions by Partnerships

(2) Distributions by Estates and Trusts

9. Section 351 Transfers of Transferee Corporation's Stock

G. Requirement of an "Exchange"

1. In General

2. Must There Be an Actual Exchange?

a. The IRS's Position

b. The Abegg and Lessinger Decisions

c. Section 367(c)

3. Consequences if § 351 Does Not Apply for Lack of an Exchange

H. The "Solely for Stock" Requirement

1. The Statutory Requirement

2. The Meaning of the Term "Stock"

3. Stock Rights or Warrants and Contingent Stock Interests

a. Stock Rights or Warrants

b. Contingent Stock Interests

(1) Contingent Stock Rights

(2) Imputed Interest

(3) Escrowed Stock

4. Characterizing Debt as Equity

a. Section 385 - Treatment of Certain Interests as Stock or Indebtedness

b. Cases Distinguishing Debt from Equity

(1) Pro-rata Holding of Debt and Stock

(2) Thin Capitalization

(3) Documentation

(4) Fixed Maturity Date

(5) Fixed Interest Rate and Unconditional Payment

(6) Subordination of Instrument to Claims of Other Creditors

(7) Treatment on Books and Records

(8) Intention of Parties

(9) Acquisition of Essential Operational Assets of Business Enterprise

(10) Availability of Usual Creditor Rights

(11) Repayment Possible Only Out of Corporate Earnings

(12) Enforcement of Holders' Rights

(13) Holder Is a Shareholder

(14) Availability of Alternative Financing Sources

(15) Issuer in Default on Other Loans on Issue Date

(16) Repayment Secured with Liens or Guarantees

5. The Meaning of the Term "Securities" Under Pre-1989 RRA Law

a. Securities Treated as Boot

b. An Obligation as a "Security"

c. An Open Account Indebtedness as a "Security"

d. An Installment Sales Contract as a "Security"

e. Alternative Treatment for the Receipt of an Obligation

6. Proposed "Net Value" Regulations

I. Property Transfers by Debtor in Bankruptcy or Similar Case to a Controlled Corporation

J. Transfers to Investment Companies

IV. Receipt of Money or Other Property

A. In General

B. What Is Boot?

1. In General

a. Retained Assets

b. Transaction Costs

c. Assumption of Liabilities

d. Distribution of Contributed Property

e. Disaggregation

2. Nonqualified Preferred Stock

a. Legislative Background

b. Definition of NQPS

(1) Preferred Stock

(2) NQPS

c. Amount of Gain Recognized

d. Treatment of NQPS as Stock for Purposes of § 351 Qualification

C. Transfer of More Than One Item of Property

1. Determination of Amount and Character of Gain Realized

a. Amount of Gain Realized

b. Character of Gain Realized

2. Determination of Amount of Gain to Be Recognized - the Manner in Which Boot Is Allocated

a. Description of Methods of Allocating Boot

(1) Asset-by-Asset Proportionate Method

(2) Asset-by-Asset Appreciation Method

(3) Aggregate Method

b. Illustration of Methods for Allocating Boot

(1) Asset-by-Asset Proportionate Method

(2) Asset-by-Asset Appreciation Method

(3) Aggregate Method

c. Character of Gain

D. Treatment of Transferee - § 351(f)

E. Boot or § 301 Distribution

F. Deferred Receipt of Boot

1. Section 453

a. Applicability of the Installment Method to § 351 Transactions

b. Effect of the Installment Method

2. Imputed Interest

G. Constructive Receipt of Boot

H. Applicability of § 304

1. In General

2. Historical Conflict Between § § 304 and 351

3. Priority of § 304 over § 351

I. Notes Received by Transferor Treated as Loans

V. The Receipt of Stock for Services

A. General Rule

B. Services Rendered to or on Behalf of the Transferee Corporation in Exchange for Its Stock

1. Stock Issued for Services Rendered to Predecessor Corporation or for Future Services to Issuing Corporation

2. Transfer of Property Created by Services

3. Tax Effects to Parties Upon Transfer of Stock for Services

a. Effect on Transferors of Property

b. Effect on Issuing Corporation

c. Effect on Service Provider

(1) General Rule

(2) Receipt of Stock for Both the Providing of Services and the Transfer of Property

(3) Techniques to Reduce Service Provider's Income

C. Stock Received for Services Unrelated to Transfer of Property

1. In General

2. Tax Effect to Parties Upon Receipt of Stock for Services Unrelated to Transfer of Property

VI. Assumption of Liabilities

A. In General

B. Basic Rule - § 357(a)

1. Application of § 357(a)

2. Determination of Amount of Liabilities Assumed

a. Pre-October 19, 1998, Transfers

b. Section 357(d)

(1) Assumption of Recourse Liabilities

(2) Assumption of Nonrecourse Liabilities

C. Liabilities Assumed for Improper Motives - § 357(b)

1. In General

2. Determination of Motive

a. Cases Finding Improper Motive

b. Cases and Rulings Not Finding Improper Motive

3. Burden of Proof

4. Tax Shelter Treatment

D. Liabilities Assumed in Excess of Basis - § 357(c)

1. Section 357 in General

a. General Rule

b. Comparison of § 357(b) and § 357(c)

c. Can a Personal Note Defeat § 357(c)?

2. Section 357(c)(3)

3. Character of Gain Recognized

E. Transactions Subject to Both § 357(b) and § 357(c)

F. Intentional Recognition Through Exceptions

G. Payment of Liability by Transferor or Transferee

1. Payment by Transferor

2. Payment by Transferee

H. Liabilities Assumed in Excess of Fair Market Value

VII. Basis Computations in § 351 Transactions

A. In General

B. Basis to the Transferor

1. In General

2. Receipt of Stock of Transferee Corporation Only

3. Receipt of Stock of Transferee Corporation and Boot

4. Transfer of One or More Items of Property

5. Assumption of Liabilities

a. In General

b. When Basis Exceeds Fair Market Value

(1) Section 358(h)

(2) Special Situations

6. Deferred Gain Transactions

7. Basis in Contingent and Escrow Stock Transactions

8. Basis of Properties Acquired by Transferee Corporation from Incorporating Partnership

C. Basis to the Transferee Corporation

1. In General

2. Receipt of a Single Asset from a Transferor

3. Receipt of Multiple Assets from a Transferor

a. Allocation of Basis Among Assets

(1) Preservation of Transferor's Basis in Each Transferred Asset

(2) Aggregate Method

b. Allocation of Gain Recognized Among Multiple Assets

4. Application of Basis Rules to Particular Zero Basis Situations

a. Inventory

b. Treasury Stock

c. Other Items Assigned a Zero Basis

5. Basis of Assets When Notes Are Exchanged

6. Treatment of Gain Not Subject to Tax

7. Double Recognition of Gain or Loss

VIII. Holding Period

A. Holding Period for Stock and Boot Received by Transferor

1. General Rule

2. Transfer of Inventory-Type Assets

3. Holding Period Determination in Multiple Asset Transactions

4. Holding Period Determination in Boot Transactions

5. Holding Period of Stock or Assets Received by Partners or Partnership Upon its Incorporation

6. Contingent, Deferred, and Escrow Stock

B. Holding Period of Property Acquired by Transferee Corporation


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Major Requirements of a § 351 Tax-Deferred Exchange

Worksheet 2 Typical Fact Pattern

Worksheet 3 Form of Minutes of Transferee Corporation to Issue Stock for (and Approve Contracts Relating to) Transferred Property

Worksheet 4 Form of Minutes of Transferor Corporation Approving Transfer of Property

Worksheet 5 Form of Assignment, Bill of Sale and Assumption Agreement

Worksheet 6 Rev. Proc. 83-59, 1983-2 C.B. 575

Worksheet 7 Form of Ruling Request

Worksheet 8 Form of Significant Transferor's Statement Under Regs. § 1.351-3(a)

Worksheet 9 Form of Transferee Corporation's Statement Under Regs. § 1.351–3T(b)

Worksheet 10 Excerpt from IRS Publication 544 Sales and Other Dispositions of Assets

Worksheet 11 Publication 542, Corporations Excerpt - Property Exchanged for Stock

Worksheet 12 Senate Finance Committee Report to Accompany H.R. 8300, the Internal Revenue Code of 1954, S. Rep. No. 83-1622, at 264 (1954) [Excerpt - Code § 351 - Transfer to Corporation Controlled by Transferor]

Worksheet 13 Committee Reports to Accompany H.R. 13103, The Foreign Investors Tax Act of 1966 (P.L. 89-809) [Excerpts - Amendments to Code § 351]

Worksheet 14 Senate Finance Committee Report to Accompany H.R. 5043 Bankruptcy Tax Act of 1980 (P.L. 96-589) S. Rep. No. 96-1035, at 43 (1980) [Excerpt - Certain Transfers to Controlled Corporations]

Worksheet 15 Conference Report on H.R. 4961, The Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248) H.R. Rep. No. 97-76, at 541 (1982) [Excerpt - Use of Holding Companies to Bail Out Earnings]

Worksheet 16 Conference Report on H.R. 3299, Omnibus Budget & Reconciliation Act of 1989, H.R. Rep. No. 101-386, at 555 (1989) [Excerpt - Limit Nonrecognition Treatment When Securities Are Received in Certain § 351 Transactions]

Worksheet 17 Conference Report on H.R. 2014, Taxpayer Act of 1997, H.R. Rep. No. 105-220, at 543 (1997) [Excerpt - Treat Certain Preferred Stock as Boot]

Worksheet 18 Senate Finance Committee Report to Accompany H.R. 2676, Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-206) S. Rep. No. 105-174 (1998) [Excerpt - Certain Preferred Stock Treated as Boot - Treatment of Transferor]

Worksheet 19 House Ways and Means Committee Report to Accompany H.R. 4738, Tax and Trade Relief Extension Act of 1998 (P.L. 105-277) H. R. Rep. No. 105-817 (1998) [Excerpt - Treatment of Certain Corporate Distributions]

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

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