Under § 351, you’re not alone – you can join with other transferors to meet the 80% control test. But not everyone counts. Only those who transfer property (not services) count. And the IRS has rules to prevent taxpayers from bringing in “token” transferors just to meet the 80% threshold.
The casebook discusses Kamborian v. Commissioner, 56 T.C. 847 (1971), aff’d, 469 F.2d 219 (1st Cir. 1972). International Shoe Machinery wanted to acquire Campex stock in a tax‑free exchange. The three individuals and one trust that owned all the Campex stock would end up with only 77.3% of ISM’s stock – just short of the 80% needed. So they brought in a fifth shareholder (another trust) to buy a small amount of ISM stock for cash. The new stock didn’t appreciably change that trust’s ownership.
The Tax Court held that the transfer didn’t qualify. The fifth trust’s transfer was of “relatively small value” and its primary purpose was to qualify the transaction under § 351. Rev. Proc. 77‑37, 1977‑2 C.B. 568, provides a safe harbor: property transferred is not “relatively small value” if its fair market value is at least 10% of the value of the stock already owned (or to be received for services) by that person. In Kamborian, the trust already owned 13% of ISM, so it needed to transfer additional property worth at least 10% of that – but it transferred very little.
The takeaway: If you’re bringing in additional transferors, make sure they transfer real property of significant value, not just a token amount.
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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