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Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Repair Windows errors before they cause bigger problemsFix Now →Section 351 generally lets you transfer property to a corporation for its stock without recognizing gain or loss immediately. The rule works only when the transfer is for property (not merely services), the transferors control the corporation immediately afterward, and liability assumptions do not trigger an exception. Control generally means at least 80% of the combined voting power and at least 80% of every other class of stock. Assumed debt is usually ignored as money received under §357(a), but tax-avoidance arrangements can fail under §357(b), and liabilities exceeding the adjusted basis of transferred property can create gain under §357(c).
The result depends on the exact assets, stock rights, ownership percentages, liability documents, service arrangements, and transaction sequence. The Internal Revenue Service cautions that the Internal Revenue Code must be read with Treasury regulations and court decisions; the analysis below explains the governing framework, not a qualification opinion for a particular transaction.
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What a Section 351 exchange is
Section 351(a) provides nonrecognition when one or more persons transfer property to a corporation solely in exchange for stock and are in control immediately after the exchange. “Nonrecognition” means the transfer generally does not trigger current gain or loss; it does not erase the built-in gain. Instead, basis rules preserve that tax history in the stock and the corporation’s assets.
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- Was something qualifying as property transferred, or was the consideration actually for services?
- Did the transferor group satisfy the immediate 80% control test?
- Did the corporation assume liabilities that invoke §357(b) or produce gain under §357(c)?
A transaction can satisfy one question and fail another. For example, a property contribution may meet the control threshold while an excessive liability assumption still causes recognized gain.
How the 80% control test works
Control is defined by §368(c). Immediately after the exchange, the transferors must own at least 80% of the total combined voting power of all voting classes and at least 80% of the total number of shares of every other class. Both parts matter; passing the voting test alone is not enough.
| Control component | Minimum ownership immediately after exchange | What to verify |
|---|---|---|
| Combined voting power | 80% | Voting rights across all voting classes, including the rights attached to the shares issued in the exchange |
| Each nonvoting or other class | 80% of the total shares of that class | Share count for every class other than the combined voting calculation |
Measure control at the right moment
The test is measured immediately after the exchange, not months later. Record the capitalization table, voting rights, class rights, and each transferor’s ownership at closing. A later stock issuance, transfer, or change in voting rights can affect future tax planning, but it does not change the percentage measured at the exchange moment.
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When several people transfer property
The statute covers transfers by “one or more persons.” When several transferors contribute property as part of the same exchange, analyze their ownership together and document how the group reaches the 80% thresholds. Keep separate schedules for each person’s property, stock received, basis, and liabilities so that a failure or recognized-gain item can be traced to the correct transfer.
Property versus services
Section 351 is a property-for-stock rule. Treasury regulation text reproduced in IRS guidance states: Stock will not be treated as issued for property if it is issued for services rendered or to be rendered to or for the benefit of the issuing corporation.
Stock issued for services therefore does not receive the same §351 property treatment.
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How to handle a mixed contribution
Many formations involve both an asset contribution and work performed by a founder, employee, consultant, or other participant. Separate the components instead of labeling the entire exchange a §351 transaction:
- Identify each asset transferred and establish that it is property for the exchange.
- Identify services already performed or promised, and the stock issued for those services.
- Allocate the stock and any other consideration between the property and service components using a supportable agreement and contemporaneous records.
- Apply §351 only to the property-for-stock component that otherwise meets the control and liability rules.
- Analyze the service component under the rules that apply to compensation or other service income; do not include it in the property basis schedule merely because the same person also contributed assets.
A person can therefore receive stock in a transaction while only part of that stock qualifies for §351 treatment. The documents should state what was transferred, what was performed, and why each portion of the consideration was issued.
What happens when the corporation assumes liabilities
Section 357(a) supplies the general rule: when the corporation assumes a transferor liability as part of a qualifying exchange, the assumption generally is not treated as money or other property received and does not by itself prevent §351 treatment. The liability still matters for gain, basis, and documentation.
Classify every obligation
Do not use a single “debt assumed” number without reviewing the underlying obligations. List each loan, payable, tax obligation, lease liability, guarantee, and other commitment; state whether the corporation assumes it or the transferor remains responsible; and identify whether it is recourse or nonrecourse. The amount used for §§357 and 358 must be determined under the applicable rules. The IRS’s 2025 proposed-regulation discussion includes detailed measurement rules for recourse and nonrecourse liabilities, but proposed regulations can change before final adoption.
§357(b): the tax-avoidance or missing-business-purpose exception
Section 357(b) is an anti-abuse rule. IRS technical guidance states that a liability assumption may be treated as money when its principal purpose is federal tax avoidance or, absent that purpose, the arrangement lacks a bona fide business purpose. If §357(b) applies, the assumed liability is no longer protected by the normal §357(a) treatment, and the resulting money characterization can cause gain or other basis consequences.
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Prepare a contemporaneous business-purpose file: describe the operating reason for moving the liability, the commercial terms, the parties’ negotiations, and why the corporation is the appropriate obligor. A business purpose does not guarantee qualification, but the absence of one is a specific risk signal under §357(b).
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Section 357(c) is a separate gain rule, not a business-purpose test. Gain is generally recognized when the liabilities assumed exceed the total adjusted basis of the property transferred. The excess is generally treated as gain from the sale or exchange of the transferred property.
| Illustration | Adjusted basis of property transferred | Liabilities assumed | §357(c) result |
|---|---|---|---|
| A | $40,000 | $25,000 | No §357(c) gain from an excess; other rules still require review |
| B | $40,000 | $60,000 | $20,000 excess is generally recognized as gain |
These figures illustrate the comparison only. The basis total must include the adjusted basis of all transferred property, and the liability amount must be measured under the rules applicable to the particular obligations. Do not net liabilities against only one asset when several assets were transferred.
Why §357(b) and §357(c) must be tested separately
A transaction can have a genuine business purpose yet still produce §357(c) gain because debt exceeds basis. Conversely, liabilities may be below basis but still raise §357(b) concerns if the principal purpose was tax avoidance or the arrangement lacks a bona fide business purpose. Put both tests on the closing checklist rather than treating one as a substitute for the other.
Basis after the exchange
Nonrecognition does not create a tax-free reset. The transferor’s basis in the stock received is generally determined under §358, while the corporation generally receives carryover basis in the transferred property under §362(a).
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Transferor’s stock basis under §358
Start with the transferor’s adjusted basis in the property contributed. Then apply the §358 adjustments required for money or other property received, gain or loss recognized, dividend treatment, and applicable liability rules. The exact result depends on which liabilities are assumed, which remain with the transferor, and whether any gain is recognized under §357(b) or §357(c). Maintain an asset-by-asset schedule rather than recording the stock at its fair market value.
Corporation’s asset basis under §362(a)
The corporation generally takes carryover basis in the contributed property, adjusted for recognized gain as the statute and regulations require. Carryover basis means the corporation inherits the relevant tax basis rather than automatically using the asset’s market value. The corporation should retain the transferor’s depreciation, acquisition, and improvement records and identify any built-in gain or loss that remains embedded in each asset.
A basis worksheet that avoids common omissions
- List each asset, its adjusted basis, holding information, and fair market value at transfer.
- List each liability separately, including recourse or nonrecourse status and the amount used for the applicable computation.
- Record cash or other property received, if any, and any recognized gain or loss.
- Allocate stock received between property and service components when both exist.
- Compute the transferor’s §358 stock basis and the corporation’s §362 asset basis, retaining the supporting documents.
Step-by-step review before signing
- Define the exchange. Write down the transfer date, corporation, transferors, stock classes, and every item each person will provide or receive.
- Separate property from services. Mark contributed assets, services already rendered, and services to be rendered. Do not place service consideration in the property column.
- Test control. Use the post-closing capitalization table to calculate 80% of combined voting power and 80% of each other class.
- Inventory liabilities. Obtain loan agreements, payoff statements, guarantees, leases, and payable schedules. Mark what the corporation assumes and what remains with the transferor.
- Measure the liabilities. Apply the rules for recourse and nonrecourse obligations, noting that the IRS discussed additional measurement details in 2025 proposed regulations.
- Run both liability tests. Ask whether tax avoidance or a missing bona fide business purpose creates §357(b) risk, then compare total assumed liabilities with total adjusted basis for §357(c).
- Prepare basis schedules. Compute §358 stock basis and §362(a) corporate asset basis, including recognized gain, money or property received, and liability adjustments.
- Preserve evidence. Keep valuation work, board approvals, capitalization records, business-purpose memoranda, service agreements, and liability consents with the tax file.
- Obtain transaction-specific advice. Have a tax attorney or CPA review the documents before closing and again before filing for the relevant tax year.
Common failure points and how to correct them
Counting services as contributed property
Symptom: All founder stock is described as issued for “contributions,” even though some shares compensate promised work.
Correction: Identify the service portion, allocate consideration, and analyze it separately. Recast the records before filing rather than relying on a generic formation description.
Checking only voting percentage
Symptom: Transferors own 80% of voting power but less than 80% of another class.
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Correction: Recalculate every class using the rights and share counts that exist immediately after the exchange.
Assuming debt is always harmless
Symptom: The closing file lists liabilities but never compares them with adjusted basis or explains the business purpose.
Correction: Run the §357(b) purpose analysis and the §357(c) excess-liability computation as separate workpapers.
Using fair market value as the new basis
Symptom: The corporation books contributed assets at market value for tax purposes.
Correction: Start with carryover basis under §362(a), then apply required adjustments; retain a separate financial-accounting valuation if needed.
Current-law cautions for 2026 filings
The core framework comes from the Internal Revenue Code, Treasury regulations, IRS guidance, and court decisions. IRS material from 2015 describes the 80% control rule, and regulation text reproduced in 2016 addresses services. The IRS discussed detailed recourse and nonrecourse liability measurements in 2025 proposed regulations. Proposed regulations are not the same as final law, so verify the effective rules for the transaction’s tax year before filing.
Dates, stock rights, liability terms, and the order in which documents are signed can change the result. A formation that appears routine can produce recognized gain when low-basis assets support high debt, when service compensation is mislabeled as property, or when a new class prevents the transferors from reaching 80%.
Bottom line
A defensible Section 351 exchange requires four linked analyses: prove that the consideration is for property, document immediate 80% control, measure and classify every assumed liability, and carry the correct bases into the stock and corporate assets. Section 357(a) usually protects an assumption of liabilities, but §357(b) addresses tax-avoidance or missing business purpose and §357(c) recognizes gain when liabilities exceed adjusted basis. Because the rules are document- and fact-dependent, have a qualified tax adviser review the transaction before execution and filing.
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