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How to file a 351 election of assets to my S-Corp?

Both the corporation and any person involved in a Section 351 transfer must attach a statement to their income tax returns.

"SECTION 1.351-3. RECORDS TO BE KEPT AND INFORMATION TO BE FILED.

(a) Every person who received the stock or securities of a controlled corporation, or other property as part of the consideration, in exchange for property under section 351, shall file with his income tax return for the taxable year in which the exchange is consummated a complete statement of all facts pertinent to such exchange, including -

(1) A description of the property transferred, or of his interest in such property, together with a statement of the cost or other basis thereof, adjusted to the date of transfer.

(2) With respect to stock of the controlled corporation received in the exchange, a statement of -

(i) The kind of stock and preferences, if any;

(ii) The number of shares of each class received; and

(iii) The fair market value per share of each class at the date of the exchange.

(3) With respect to securities of the controlled corporation received in the exchange, a statement of--

(i) The principal amount and terms; and

(ii) The fair market value at the date of exchange.

(4) The amount of money received, if any.

(5) With respect to other property received -

(i) A complete description of each separate item;

(ii) The fair market value of each separate item at the date of exchanges; and

(iii) In the case of a corporate shareholder, the adjusted basis of the other property in the hands of the controlled corporation immediately before the distribution of such other property to the corporate shareholder in connection with the exchange.

(6) With respect to liabilities of the transferors assumed by the controlled corporation, a statement of--

(i) The nature of the liabilities;

(ii) When and under what circumstances created;

(iii) The corporate business reason for assumption by the controlled corporation; and

(iv) Whether such assumption eliminates the transferor's primary liability .

(b) Every such controlled corporation shall file with its income tax return for the taxable year in which the exchange is consummated -

(1) A complete description of all the property received from the transferors.

(2) A statement of the cost or other basis thereof in the hands of the transferors adjusted to the date of transfer.

(3) The following information with respect to the capital stock of the controlled corporation -

(i) The total issued and outstanding capital stock immediately prior to and immediately after the exchange, with a complete description of each class of stock;

(ii) The classes of stock and number of shares issued to each transferor in the exchange, and the number of shares of each class of stock owned by each transferor immediately prior to and immediately after the exchange, and

(iii) The fair market value of the capital stock as of the date of exchange which was issued to each transferor.

(4) The following information with respect to securities of the controlled corporation -

(i) The principal amount and terms of all securities outstanding immediately prior to and immediately after the exchange,

(ii) The principal amount and terms of securities issued to each transferor in the exchange, with a statement showing each transferor's holdings of securities of the controlled corporation immediately prior to and immediately after the exchange,

(iii) The fair market value of the securities issued to the transferors on the date of the exchange, and

(iv) A statement as to whether the securities issued in the exchange are subordinated in any way to other claims against the controlled corporation.

(5) The amount of money, if any, which passed to each of the transferors in connection with the transaction.

(6) With respect to other property which passed to each transferor -

(i) A complete description of each separate item;

(ii) The fair market value of each separate item at the date of exchange, and

(iii) In the case of a corporate transferor, the adjusted basis of each separate item in the hands of the controlled corporation immediately before the distribution of such other property to the corporate transferor in connection with the exchange.

(7) The following information as to the transferor's liabilities assumed by the controlled corporation in the exchange -

(i) The amount and a description thereof,

(ii) When and under what circumstances created, and

(iii) The corporate business reason or reasons for assumption by the controlled corporation.

(c) Permanent records in substantial form shall be kept by every taxpayer who participates in the type of exchange described in section 351, showing the information listed above, in order to facilitate the determination of gain or loss from a subsequent disposition of stock or securities and other property, if any, received in the exchange."

Sorry for the length; but I wanted to be sure you had the pertinent sections of the regulations.

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Resolved Question:

How do I file a 351 election for the contribution of assets to my S-Corp? Is there a specific form I need to file with my corporate tax return? Or do I file with my personal?

Submitted: 9 years ago.
Answered in 11 minutes by:
4/6/2008
jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
Verified

Both the corporation and any person involved in a Section 351 transfer must attach a statement to their income tax returns.

"SECTION 1.351-3. RECORDS TO BE KEPT AND INFORMATION TO BE FILED.

(a) Every person who received the stock or securities of a controlled corporation, or other property as part of the consideration, in exchange for property under section 351, shall file with his income tax return for the taxable year in which the exchange is consummated a complete statement of all facts pertinent to such exchange, including -

(1) A description of the property transferred, or of his interest in such property, together with a statement of the cost or other basis thereof, adjusted to the date of transfer.

(2) With respect to stock of the controlled corporation received in the exchange, a statement of -

(i) The kind of stock and preferences, if any;

(ii) The number of shares of each class received; and

(iii) The fair market value per share of each class at the date of the exchange.

(3) With respect to securities of the controlled corporation received in the exchange, a statement of--

(i) The principal amount and terms; and

(ii) The fair market value at the date of exchange.

(4) The amount of money received, if any.

(5) With respect to other property received -

(i) A complete description of each separate item;

(ii) The fair market value of each separate item at the date of exchanges; and

(iii) In the case of a corporate shareholder, the adjusted basis of the other property in the hands of the controlled corporation immediately before the distribution of such other property to the corporate shareholder in connection with the exchange.

(6) With respect to liabilities of the transferors assumed by the controlled corporation, a statement of--

(i) The nature of the liabilities;

(ii) When and under what circumstances created;

(iii) The corporate business reason for assumption by the controlled corporation; and

(iv) Whether such assumption eliminates the transferor's primary liability .

(b) Every such controlled corporation shall file with its income tax return for the taxable year in which the exchange is consummated -

(1) A complete description of all the property received from the transferors.

(2) A statement of the cost or other basis thereof in the hands of the transferors adjusted to the date of transfer.

(3) The following information with respect to the capital stock of the controlled corporation -

(i) The total issued and outstanding capital stock immediately prior to and immediately after the exchange, with a complete description of each class of stock;

(ii) The classes of stock and number of shares issued to each transferor in the exchange, and the number of shares of each class of stock owned by each transferor immediately prior to and immediately after the exchange, and

(iii) The fair market value of the capital stock as of the date of exchange which was issued to each transferor.

(4) The following information with respect to securities of the controlled corporation -

(i) The principal amount and terms of all securities outstanding immediately prior to and immediately after the exchange,

(ii) The principal amount and terms of securities issued to each transferor in the exchange, with a statement showing each transferor's holdings of securities of the controlled corporation immediately prior to and immediately after the exchange,

(iii) The fair market value of the securities issued to the transferors on the date of the exchange, and

(iv) A statement as to whether the securities issued in the exchange are subordinated in any way to other claims against the controlled corporation.

(5) The amount of money, if any, which passed to each of the transferors in connection with the transaction.

(6) With respect to other property which passed to each transferor -

(i) A complete description of each separate item;

(ii) The fair market value of each separate item at the date of exchange, and

(iii) In the case of a corporate transferor, the adjusted basis of each separate item in the hands of the controlled corporation immediately before the distribution of such other property to the corporate transferor in connection with the exchange.

(7) The following information as to the transferor's liabilities assumed by the controlled corporation in the exchange -

(i) The amount and a description thereof,

(ii) When and under what circumstances created, and

(iii) The corporate business reason or reasons for assumption by the controlled corporation.

(c) Permanent records in substantial form shall be kept by every taxpayer who participates in the type of exchange described in section 351, showing the information listed above, in order to facilitate the determination of gain or loss from a subsequent disposition of stock or securities and other property, if any, received in the exchange."

Sorry for the length; but I wanted to be sure you had the pertinent sections of the regulations.


jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
Verified
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Customer reply replied 9 years ago

I contributed
Computers of 2100 FMV -
Furniture of 4150 FMV
Equipment of 4750 FMV
I don't know my basis in these assets. I think some of them were depreciated and some were just personal assets that I purchased myself.

Can I just do an excel worksheet showing the individual amounts? It sounds like there is no specific form? Do you have any kind of worksheet you could send me to figure this out.

Indeed, there is no form. It is just a statement. Yes, you could use a spreadsheet.

If you were using these items in another business activity, you could use the depreciation schedule from that business (or the relevant portions) for your basis and the list. But yes, you will have to list the assets and you do definitely need to know your basis as that is the basis the corporation must use for depreciation (unless the fair market value at time of transfer is less than your basis).

Usually we just put a statement such as: "The following assets were transferred from ______(name)__EIN to __________ Name__EIN in a tax free exchange under IRC section 351. " and follow that with the list(s) of items.

Are you self-preparing a corporate income tax return? If so, that software may have a section with elections that will produce the statement you need (this is what my professional tax software does.)

I hope that helps.

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Customer reply replied 9 years ago

One more question. Sorry about that.

I put the assets on my books at FMV (actually less than FMV to be conservative), it sounds like that may be wrong.

I had the entry as
Fixed Assets (in each category) Debit 11k
Common Stock Credit 11k

Then I was depreciating based on the 11k which sounds like it is too much.

If I put the assets on the books using my basis and then issue stock for FMV what entry do I use to balance the JE?

The company's basis in donated property is the smaller amount of either the Fair Market Value or the shareholder's Adjusted Basis. When you convert your business property to an S-Corp, the S-Corp inherits your adjusted basis.

Did you have some reason to think you can get a capital contribution greater than your basis? Have you talked any of these issues through with a tax practitioner?

I did find an Excel 2003 template for assets and depreciation at http://office.microsoft.com/en-us/templates/TC011843741033.aspx but have not ever used it myself.

I hope this helps further.

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Customer reply replied 9 years ago

For some reason I thought that the Corp issued stock to me for the FMV of the property rec'd. That is where I was confused on the balancing JE. Yes that makes sense that the basis would be my basis but I thought the point of the 351 was so that I would not have to recognize a gain on the transfer.

I knew that my basis in the stock would be my basis in the assets but I thought that the corp. would put the stock issue on their books at the FMV and I would record the difference somewhere(I was putting it to the asset which obviously is wrong)

I am actually an accountant and just took a corporate accounting class so I know enough to get myself in trouble. Yikes!

So let me know if I understand.
I put the assets on the books at my adjusted basis and that is the amount of stock I receive as well.

Yes, put the assets on the books at adjusted basis and that is the amount of stock as well. (Unless, as mentioned earlier, the fair market value is less than your basis - then use that amount.)

From http://www.unclefed.com/IRS-Forms/2001/HTML/p54202.html : Basis of stock or other property received. The basis of the stock you receive is generally the adjusted basis of the property you transfer. Increase this amount by any amount treated as a dividend, plus any gain recognized on the exchange. Decrease this amount by any cash you received, the fair market value of any other property you received, and any loss recognized on the exchange. Also decrease this amount by the amount of any liability the corporation assumed from you, unless payment of the liability gives rise to a deduction when paid.

I hope this helps clarify for you.

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Customer reply replied 9 years ago

Thank you so very much! You really helped me out.

You are quite welcome. Thank you for the opportunity to be of service.
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