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Related to section 351- If a group of LLC stockholders (none

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Related to section 351- If a group of LLC stockholders (none related to the others) exchanges their stock for stock in another corporation's stock, is it a 351 exchange? No individual owns 80% control before or after, but as a group they do.
Submitted: 4 years ago via Cornell Legal Info Institute.
Category: Business Law
Expert:  Maverick replied 4 years ago.

Generally, transferring property into a corporation in exchange for its stock is a taxable event. The transaction is treated as if you sold property to the corporation in return for cash. The difference between the stock value received and the tax basis in the property transferred to the corporation will result in a gain or loss.

 

However, concern about a tax liability as the result of incorporating a currently unincorporated business could act as a barrier to incorporation. So, Congress enacted Section 351 to remove this barrier to incorporation of an unincorporated business.

 

So, from a policy stand point, it would appear that the history of the legislation would not support such a tax deferred transfer.

 

That being said, I found not limitation on the use of the word "property" under Section 351. In fact, the link below appears to actually recognize a stock for stock type of transfer under a 351 exchange.

 

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=034b305396d882ea4579840c4730530c&rgn=div8&view=text&node=26:4.0.1.1.1.0.13.131&idno=26

 

 

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Maverick, Attorney
Category: Business Law
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Customer: replied 4 years ago.

You missed my point. Is a shareholder (not a controlling shareholder) of an LLC allowed to exchange his shares for another corporation tax free? The shareholder does not control either the first or second corporation. The group of shareholder all want to do the exchange but isn't each one looked at separately related to the "control" issue?

Expert:  Maverick replied 4 years ago.

Sec. 351. Transfer to corporation controlled by transferor

(a) General rule
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 (as defined in section 368(c)) of the
corporation.

 

368 (c) Control defined
For purposes of part I (other than section 304), part II, this
part, and part V, the term ''control'' means the ownership of stock
possessing at least 80 percent of the total combined voting power
of all classes of stock entitled to vote and at least 80 percent of
the total number of shares of all other classes of stock of the
corporation.

 

YES, it will work as a group.

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