A person who receives stock solely for services in a section 351 transaction:

Recognizes ordinary income equal to the stock's FMV, and generally is not counted as a transferor for the control test

Is always counted toward the 80% control test

Generally, a corporation's assumption of a transferor's liability in a section 351 exchange is:

Not treated as boot, unless there is a tax-avoidance purpose or no bona fide business purpose

Treated as ordinary income to the corporation equal to the full amount of the liability assumed

Can a transferor recognize a loss in a section 351 exchange if he receives boot?

No; losses are never recognized in a section 351 exchange

Yes, to the extent of the fair market value of the boot received

What is the holding period of stock received in a section 351 exchange for a capital asset or section 1231 property?

It includes the holding period of the property transferred

It begins on the day after the date of the section 351 exchange

Which transfer to an existing corporation qualifies under IRC 351?

Two people together transfer property and afterward own 85% of the voting and nonvoting stock

One person transfers property and owns 60% afterward

A person transfers services only for 90% of the stock

An existing 10% shareholder alone contributes cash for 5% more stock, with no other transferors

Forming a corporation: Section 351

Transferring property to a corporation is tax-free under section 351 if the transferors own at least 80% of the voting power and 80% of each other class of stock immediately afterward; gain is recognized only to the extent of boot, and liabilities in excess of basis also trigger gain.

Updated 2026-09-23 · 4 sources · By the EnrolledAgentKit team

Exam part

Part 2

Businesses

IRS domain

Business Entities and Considerations

30 of 85 scored Qs

Tax year tested

2025

2026-27 SEE

Practice questions

10 free below

The rules the exam tests

Figures for tax year 2025, the year the 2026-27 SEE tests. Verify against the cited primary source.
Rule	What it says (2025)	Source
Control	>= 80% of total voting power and of each other class, immediately after	IRC 368(c)
Gain recognized	Lesser of realized gain or boot; no losses	IRC 351(b)
Shareholder stock basis	Property basis + gain recognized - boot received (- liabilities assumed)	IRC 358
Corporation's basis	Transferor's basis + gain recognized by transferor	IRC 362
Liabilities assumed	Not boot, unless tax-avoidance purpose	IRC 357(a), (b)
Liabilities > basis	Excess is gain	IRC 357(c)
Stock for services	Ordinary income; service-only transferors not counted for control	IRC 351(d)
Holding period	Tacks for capital and 1231 assets	IRC 1223(1)

Worked example

Facts: Joe transfers land (basis $30,000, FMV $100,000) to a new corporation for 100% of the stock (worth $90,000) plus $10,000 cash.

Result: realized gain $70,000; recognized = boot $10,000. Joe’s stock basis = $30,000 + $10,000 - $10,000 = $30,000. Corporation’s land basis = $30,000 + $10,000 = $40,000.

Exam traps

The 80% test applies to all transferors as a group.
Losses are never recognized, even with boot.
Service providers are not “transferors” unless they also transfer property.
Liabilities over basis (357(c)) is gain even with no cash boot.