How to Prepare and File a 351 Statement
Learn the specific IRS disclosure requirements for a tax-deferred 351 exchange, including the distinct reporting obligations for each party involved.
A Section 351 transaction allows for the transfer of property to a corporation in exchange for its stock without an immediate tax liability. This tax-deferred treatment is permitted when the person or group transferring the property controls the corporation immediately after the exchange. To verify the transaction meets the necessary criteria, the Internal Revenue Service (IRS) requires a detailed statement from both the person transferring the property and the corporation receiving it.
Transferor Statement Requirements
A person who qualifies as a “significant transferor” in a Section 351 exchange must provide a statement detailing their side of the transaction. This applies to a person who owns at least 5% of the corporation’s stock (by vote or value) immediately after the exchange if the stock is publicly traded, or at least 1% if it is not. This statement must contain specific information per Treasury Regulation §1.351-3, starting with the name and taxpayer identification number (TIN) of the corporation that received the property.
The statement must include a complete description of the property transferred, its tax basis, and its fair market value (FMV) on the date of the transfer. Basis is what the property originally cost the transferor, adjusted for factors like depreciation. The transferor must also provide the specific date the transfer occurred.
A full description of the stock received from the corporation is necessary, including its class, the number of shares, and its FMV. If the transferor received anything in addition to stock, such as cash or other property, this is known as “boot” and must be described and valued. The statement must also address any liabilities of the transferor that the corporation assumed, providing the nature and amount of the liability. If the IRS issued any private letter rulings for the exchange, the statement must include the date and control number for each ruling.
Transferee Corporation Statement Requirements
The corporation that receives property in a Section 351 exchange has its own separate, though similar, reporting obligation. The corporation’s statement provides the IRS with a complete record from its perspective, ensuring all aspects of the transaction are documented.
The corporation begins its statement by providing its own name and TIN. It must then list all the property it received from the transferor, or from all transferors if multiple parties participated in the exchange. For each piece of property received, the corporation must state the tax basis it had in the hands of the transferor just before the exchange. This is important because the corporation will generally assume the transferor’s basis in the property.
The statement must also detail all the stock the corporation issued to the transferor(s). This includes the class of stock, number of shares, and the fair market value of the stock issued. Any other property or cash (“boot”) given to the transferor(s) or liabilities of the transferor that the corporation assumed in the transaction is also required.
A primary requirement for the transferee corporation is the inclusion of a balance sheet. This balance sheet must show the corporation’s assets, liabilities, and equity immediately before and immediately after the exchange.
How to Prepare and File the Statement
The “351 statement” is not a specific IRS form that can be downloaded; it is a document that the taxpayer must create. The document should be clearly titled, for example, “Statement Pursuant to Treasury Regulation §1.351-3 by [Transferor Name and TIN],” to identify its purpose to the IRS. The information should be organized logically, addressing each required point from the regulations.
Once prepared, the statement must be attached to the party’s federal income tax return for the tax year in which the exchange took place. For an individual transferor, this means attaching the statement to their Form 1040. For a corporate transferor, it would be attached to its own corporate tax return.
The transferee corporation follows a similar procedure, attaching its statement to its corporate income tax return, typically Form 1120. However, the corporation is not required to file its own separate statement if a statement prepared by a significant transferor, which includes all the required corporate information, is attached to the same income tax return for the same exchange. All parties must fulfill this filing requirement, as failure to do so can result in the transaction not being recognized as tax-deferred, potentially leading to immediate taxation.