AICPA Representative Tasks (verbatim). 1. Application, Calculate a shareholder's tax realized and recognized gain (loss) on the contribution of noncash property to a C corporation, and the C corporation's basis in the property contributed. 2. Application, Calculate the tax realized and recognized gain (loss) for both a C corporation and shareholders on a nonliquidating distribution of noncash property, and the shareholders' basis in the property received. 3.
When shareholders contribute property to a C corporation in exchange for stock, §351 permits nonrecognition of gain or loss if the transferors collectively own at least 80% of the corporation's voting stock and 80% of all other classes immediately after the exchange.
Boot includes cash, debt relief, and property other than qualifying stock. Services do not qualify as property for §351 purposes.
KEY: The 80% control test is applied immediately after the exchange and includes all transferors acting as part of a single plan.
Common mistakes
- Applying §351 when transferors lack 80% control. The control requirement must be satisfied immediately after the exchange. Trap: assuming any property-for-stock exchange is tax-free. Correct: verify 80% control test including all transferors in the plan.
- Allowing loss recognition on nonliquidating property distributions. Corporations recognize gain but not loss on nonliquidating distributions. Trap: "corporation recognizes the $20,000 loss on distributed property." Correct: loss is disallowed; sell the property first if loss recognition is desired.
- Confusing basis rules between liquidating and nonliquidating distributions. In both cases, shareholder basis in distributed property equals FMV. However, corporate treatment differs, loss allowed in liquidation, not in nonliquidating distributions.
Bottom line
- §351 defers gain on property contributions when transferors collectively control 80% of the corporation immediately after the exchange; shareholder takes substituted basis, corporation takes carryover basis (increased by any gain recognized)
- §351 stock basis equals property basis minus boot plus gain recognized, and it cannot fall below zero
- Nonliquidating property distributions: corporation recognizes gain (not loss) as if sold at FMV; shareholder's basis in the property equals FMV
- Cash distributions follow the E&P waterfall: current E&P (allocated pro rata), then accumulated E&P, return of capital to zero basis, then capital gain
Exam shortcut
"Boot = gain, up to realized." In any §351 exchange, recognized gain equals the lesser of realized gain or boot received. Calculate realized first, then cap at boot. "Nonliquidating = gain only; liquidating = gain and loss." Corporate recognition rules flip between distribution types. Quickly classify the distribution to apply the correct rule. "E&P waterfall: Current-Accumulated-Basis-Gain." Memorize the four layers.
The full lesson (about 2,558 words, 17 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.A2
Browse all free CPA TCP lessons or jump into free CPA TCP practice questions.