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Section 351 incorporation transfers: a fact-intake checklist before closing

Reviewed 2026-09-15 · AI-assisted draft and editing; sources and limitations remain visible for independent review.

Answer: Section 351(a) defers gain and loss when one or more persons transfer property to a corporation solely in exchange for its stock and, immediately after the exchange, those persons are in control of the corporation as control is defined in section 368(c). Four factual forks decide most files, and a different provision answers each one. What moved: section 351(d) removes services, certain indebtedness of the transferee that is not evidenced by a security, and accrued interest on that indebtedness from the meaning of property, and Regulations section 1.351-1(a)(1)(i) makes the matching point from the stock side. Who holds what afterwards: control is 80 percent of combined voting power and 80 percent of the total number of shares of every other class. What else was received: section 351(b) recognizes gain up to the money plus the fair market value of other property received, and never a loss. What the corporation took on: section 357(a) keeps an assumed liability out of boot, while section 357(b) and section 357(c) each convert it back into gain on their own separate conditions. Basis then runs in two directions that must be computed separately, transferor-side under section 358 and corporate-side under section 362. The Code text relied on here was read on a page stating it contains the laws in effect on September 14, 2026, and the regulations in the Code of Federal Regulations edition revised as of April 1, 2025. This checklist organizes the intake; it does not qualify any particular contribution.

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Scope

Jurisdiction: United States — federal

Tax periods: Not period-specific; checked 2026-09-15, Code as in effect 2026-09-14

Assumptions

Exclusions

1. Separate property from everything else that moved

Section 351(a) opens only if what a transferor handed over is property. Section 351(d) is titled for the point: services, certain indebtedness of the transferee corporation, and accrued interest are not treated as property for this purpose. Regulations section 1.351-1(a)(1)(i) states the same rule from the other side, providing that 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.

Two neighboring rules belong in the same intake pass. Regulations section 1.351-1(a)(1)(ii) provides that stock is not treated as issued for property where the property transferred is of relatively small value in comparison to the value of the stock already owned, or to be received for services, by that transferor, and the primary purpose of the transfer is to qualify the exchanges of other transferors. The same regulation states that stock rights and stock warrants are not stock. An intake sheet that records only a line called contributed assets will miss both.

Record, for each transferor: the asset or right transferred, its adjusted basis and fair market value, whether any part of the consideration is compensation for services, the class and number of shares issued, and whether any instrument issued is a right or a warrant rather than stock. Section 351(g) provides that nonqualified preferred stock is not treated as stock, so the class received is a fact to capture rather than a formality.

2. Test control immediately after the exchange

Control comes from section 368(c) and is repeated in Regulations section 1.351-1(a)(1): 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. Both prongs must be satisfied, and the second is a count of shares in each other class, not a value test.

The phrase immediately after the exchange is not a stopwatch. The regulation states that it does not necessarily require simultaneous exchanges by two or more persons, but comprehends a situation where the rights of the parties have been previously defined and the execution of the agreement proceeds with an expedition consistent with orderly procedure. The facts that matter are therefore documentary: when the parties' rights were fixed, what the closing sequence was, and what was agreed would happen to the shares afterwards.

Mixed consideration complicates the count rather than resolving it. Regulations section 1.351-1(a)(2) contains an example in which one person transfers property and has also rendered services to the corporation, receiving a single block of shares; the example applies section 351(a) to the property exchange while treating the service element as ordinary compensation income. In that example the whole block is counted: because the transferor owns 80 percent of the outstanding stock immediately after the transaction, no gain is recognized on the property exchange, and only the service element is ordinary income. What can pull a block back out of the count is the pair of limits in Regulations section 1.351-1(a)(1)(i) and (a)(1)(ii), so the fact to record is the value of the property transferred against the value of the stock that transferor already owned or is receiving for services.

3. Price boot and liabilities as two different problems

Section 351(b) is the boot rule. Where the transferor receives money or other property in addition to permitted stock, gain is recognized but not in excess of the sum of the money and the fair market value of the other property received, and no loss is recognized. Boot does not disqualify the exchange; it limits how much of the exchange is deferred.

Liabilities have their own provisions and belong on a separate line. Section 357(a) provides that an assumption of the transferor's liability is not treated as money or other property and does not defeat section 351 treatment. Section 357(b) reverses that where the principal purpose of the assumption was avoidance of federal income tax on the exchange or was not a bona fide business purpose, and it puts the burden on the taxpayer by the clear preponderance of the evidence. Section 357(c)(1) treats the excess of the liabilities assumed over the total adjusted basis of the property transferred as gain from the sale or exchange of a capital asset or of property that is not a capital asset, as the case may be.

Two details decide a great many files. Section 357(c)(3)(A) excludes from that computation a liability the payment of which would give rise to a deduction or would be described in section 736(a), and section 357(c)(3)(B) withdraws that exclusion to the extent the incurrence of the liability created or increased the basis of any property. Section 357(d)(1) then says when a liability counts as assumed at all: a recourse liability is treated as assumed if, on all the facts and circumstances, the transferee has agreed to and is expected to satisfy it, whether or not the transferor has been relieved of it; a nonrecourse liability is generally treated as assumed by the transferee of the asset subject to it, reduced under section 357(d)(2) where an owner of other assets subject to the same liability has agreed to satisfy part of it.

4. Run the two basis computations separately

Transferor side. Section 358(a)(1) gives the stock received the basis of the property transferred, decreased by the money received and by the fair market value of any other property received, and increased by the amount of gain recognized to the taxpayer. Section 358(a)(2) gives any other property received a basis equal to its fair market value. Section 358(d)(1) then treats an assumption of the transferor's liability as money received on the exchange for this computation, and section 358(d)(2) switches that treatment off for a liability excluded under section 357(c)(3). A deductible payable can therefore fall outside the section 357(c) gain computation and outside the section 358 basis reduction at the same time, which is why the two must be traced together.

Corporate side. Section 362(a) gives the corporation the same basis the property had in the transferor's hands, increased by the amount of gain recognized to the transferor on the transfer. Section 362(e)(2) caps that where the aggregate adjusted bases of property transferred in a section 351 transaction would exceed the aggregate fair market value: the transferee's aggregate adjusted bases are limited to fair market value immediately after the transaction. Section 362(e)(2)(C) permits the transferor and transferee to elect instead to limit the transferor's basis in the stock received to fair market value, and the statute states that such an election, once made, is irrevocable.

A practical consequence for the workpaper: four columns per transferor, being property basis, property value, liabilities assumed, and consideration other than stock. Gain under section 351(b), gain under section 357(c), stock basis under section 358, and corporate basis under section 362 each draw on those columns differently. One blended net-contribution figure cannot support four different return positions.

5. What would change the answer

Movement in the share register around closing, because control is tested immediately after the exchange and the regulation's expedition standard looks to when the parties' rights were defined. A pre-arranged disposition of the shares received belongs in the file, not in a footnote.

A transferor whose contribution is small relative to stock already held, a class of stock that turns out to be nonqualified preferred under section 351(g), a liability whose payment would have produced a deduction, accrued interest on transferee indebtedness, or an aggregate built-in loss large enough to bring section 362(e)(2) into play. Each of these changes a different line of the computation rather than the whole result.

Facts this page does not reach: a foreign transferor or foreign transferee, a transfer that falls within the exceptions in section 351(e), and any later distribution or redemption that could recharacterize what the parties did.

6. Where this page stops

This page prices a contribution, not a purchase. The sibling page titled Asset purchase or stock purchase: where the federal tax consequences actually diverge begins where consideration is paid for a business rather than exchanged for its stock, and the sibling titled Does the transaction qualify under section 368? A qualification sequence handles amalgamations rather than organizations.

Once the four intake columns are populated, ask Taxterity to assemble the authorities for each fork in your own fact pattern, or run a Federal Tax Memo on the contribution, then verify every citation against the current Code and regulations before you rely on it.

Related research

Official sources

  1. 26 U.S.C. 351 — Transfer to corporation controlled by transferor — § 351(a), (b), (d), (e) and (g); page states the text contains laws in effect on September 14, 2026
  2. 26 U.S.C. 357 — Assumption of liability — § 357(a); (b)(1) and the burden of proof in (b)(2); (c)(1); (c)(3)(A) and (B); (d)(1)(A) and (B); (d)(2)
  3. 26 U.S.C. 358 — Basis to distributees — § 358(a)(1)(A) and (B); § 358(a)(2); § 358(d)(1) and (d)(2)
  4. 26 U.S.C. 362 — Basis to corporations — § 362(a); § 362(e)(2)(A) and the election in § 362(e)(2)(C)
  5. 26 U.S.C. 368 — Definitions relating to corporate reorganizations — § 368(c) definition of control, applied by section 351(a)
  6. 26 CFR 1.351-1 — Transfer to corporation controlled by transferor — § 1.351-1(a)(1) including (a)(1)(i) and (a)(1)(ii); (a)(2) Example 3; 26 CFR ch. I, 4-1-25 edition

Limitations