To qualify for nonrecognition under § 351, the transferors must control the corporation “immediately after the exchange.” Control means owning at least 80% of the voting power and 80% of each class of nonvoting stock. § 368(c).
But what if the transferor agrees, as part of the same transaction, to sell some of the stock he receives to another person? Does that defeat control? In Intermountain Lumber Co. v. Comm’r, 65 T.C. 1025 (1976), the court said yes.
Dee Shook contributed a sawmill to a new corporation and received 364 shares. At the same time, he signed a binding agreement to sell 182 of those shares to Milo Wilson over time, with Wilson getting voting rights immediately. The court held that Shook did not have control “immediately after the exchange” because he had irrevocably agreed to part with half the shares as part of the same transaction.
The court applied the “step transaction doctrine,” which can integrate multiple steps into a single transaction. Under the “binding commitment” test, if the parties have a binding commitment to take future steps, those steps are treated as part of the initial transaction. The lesson: If you’re planning a § 351 transfer, don’t pre‑arrange a sale of the stock you receive. Wait until after the transfer is complete, or you may lose the tax‑free treatment.
This article is for general informational purposes only and is subject to change. Tax laws are complex and vary by situation. You should consult a qualified professional for advice specific to your circumstances. For questions, contact Alan Goldstein.
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