26 U.S.C. § 351 — Transfer to corporation controlled by transferor

(a) General rule: No gain or loss is taxed when one or more people transfer property to a corporation solely in exchange for that corporation's stock, if right after the exchange those people control the corporation, using the definition of "control" in section 368(c). (b) Receipt of property: If subsection (a) would otherwise apply, but the person also receives money or other property besides the stock, then: (1) any gain is taxed, but only up to the amount of money received plus the fair market value of the other property received. Work it out step by step: add up the cash and the fair value of the extra property received; that total is the most gain that can be taxed; if the actual gain is smaller, only that smaller amount is taxed. (2) No loss can be claimed on this exchange. (c) Special rules where distribution to shareholders: (1) When deciding whether the transferor has "control" for this section, it doesn't count against them if a corporate transferor later distributes some or all of the stock it received to its own shareholders. (2) If that distribution also qualifies as a tax-free spinoff under section 355 (or the related parts of section 356), then — only for figuring out the tax treatment of the original property transfer to the controlled corporation — it doesn't matter whether the shareholders later sell the distributed stock, or whether the spun-off corporation issues more of its own stock. "Control" is still measured the same way for that purpose. (d) Services, certain indebtedness, and accrued interest not treated as property: Stock is not treated as received "for property" if it's given in exchange for (1) services performed, (2) debt owed by the receiving corporation that isn't backed by a formal security, or (3) interest on the receiving corporation's debt that built up on or after the transferor started holding that debt. (e) Exceptions: This section does not apply to: (1) A transfer of property to an investment company. Whether a company counts as an "investment company" is determined by (A) counting all the stock and securities it holds, and (B) treating the following as stock or securities: money; stock and other equity interests in a corporation, debt instruments, options, futures and forward contracts, notional principal contracts, and other derivatives; foreign currency; interests in real estate investment trusts, common trust funds, regulated investment companies, or publicly traded partnerships (or anything convertible into these); interests in precious metals, unless the metal is used in an active trade or business after the transfer (subject to regulations); interests in an entity made up mostly of these assets (subject to regulations); interests in other entities to the extent their value comes from these assets (as regulations specify); and any other asset the Secretary specifies by regulation. The Secretary may also write rules treating some of these assets as not counting, in appropriate circumstances. (2) A transfer of a debtor's property under a court-approved plan while the debtor is in a bankruptcy or similar case, to the extent the stock received is used to pay off the debtor's debts. (f) Treatment of controlled corporation: If (1) property is transferred to a corporation in an exchange where the transferor doesn't have to recognize some or all of the gain or loss under this section, and (2) the exchange isn't part of a corporate reorganization plan, then section 311 applies to any transfer the controlled corporation makes in that exchange, as if it were a distribution under subpart A of part I. (g) Nonqualified preferred stock not treated as stock: (1) If a person transfers property and receives "nonqualified preferred stock" in return: (A) the tax-free rule in subsection (a) does not apply to them, and (B) if they also receive stock other than the nonqualified preferred stock, subsection (b) applies to them, and the nonqualified preferred stock is treated as "other property" under subsection (b). (2) "Nonqualified preferred stock" means preferred stock where (A) the holder can require the issuer or a related party to redeem or buy it back; the issuer or related party must redeem or buy it back; the issuer or related party can redeem or buy it back and, as of the issue date, is more likely than not to do so; or the dividend rate changes based on interest rates, commodity prices, or similar indexes. (B) These rules apply only if the right or requirement can be exercised within 20 years of the stock's issue date, and isn't subject to a condition that, as of issuance, makes redemption unlikely. (C) Exceptions: a right or requirement doesn't count under (A)(i)-(iii) if (i) it can only be exercised if the holder dies, becomes disabled, or becomes mentally incompetent, or (ii) — for stock received as reasonable pay for services — it can only be exercised when the holder leaves that job. But exception (i) doesn't apply if the stock involved is in a corporation whose stock (or a related company's stock) is publicly traded, or will become publicly traded as part of the same transaction. (3) Definitions: (A) "Preferred stock" means stock with a limited, fixed dividend that doesn't meaningfully share in the company's growth; possible dividends above that fixed amount don't count if there's no real, meaningful chance they'll actually be paid. (B) "Related person" follows the relationship tests in section 267(b) or 707(b). (4) Regulations: The Secretary may issue regulations needed to carry out this subsection and related sections (354(a)(2)(C), 355(a)(3)(D), and 356(e)), and may extend consistent treatment of nonqualified preferred stock to other parts of the tax code. (h) Cross references: (1) For special rules when another party assumes a liability, see section 357. (2) For how to figure the basis of stock or property received, see sections 358 and 362. (3) For special rules when this kind of exchange is also a gift, see section 2501 and following. (4) For special rules when this kind of exchange also has the effect of paying compensation, see section 61(a)(1). (5) For how this section coordinates with section 304, see section 304(b)(3).