Section 351

section 351 permits shareholders of a corporation to defer recognition of a gain or loss on the transfer of assets to the corporation. The transfer of property may be made when a new corporation is formed or may reflect additional capital contributions to an existing corporation. Without Section 351, a sole proprietorship or a partnership would have difficulty adopting the corporate form of organization for legal and/or tax purposes because the transfer of appreciated property would constitute a taxable transaction in a recognized gain.
The deferral of gain or loss under Section 351 can be justified because the assets have merely been transferred to a corporation that is controlled by the transferors. Section 351 also prevents the recognition of losses on transfers of property that has declined in value.
Gains or losses are recognized if the following conditions are met:
Property is transferred to the corporation only in exchange for stock in the transferee corporation.
Immediately after the exchange, the transferor-shareholders in aggregate control the transferee corporation by owning at least 80% of its stock.
And If a transferor receives money or property (other than stock in the transferee corporation), the transferor recognizes a gain (but no loss) equal to the lesser of the boot received or the realized gain. In addition, a corporation that transfers appreciated property (other than its own stock or debt obligations) to the transferor-shareholders also recognizes a gain on the exchange.
The character of any gain recognized by the transferor depends on the type of asset transferred (capital gain on capital assets, Section 1231 gain on Section 1231 property, and ordinary income on other property).
Depreciation recapture does not apply to a Section 351 transfer unless the transferor recognizes a gain on the depreciable property that is