20.7 §351 Transfers, §1032, §1202 QSBS & Other Corporate Provisions
Key Takeaways
- §351 allows tax-free incorporation when transferors collectively control 80%+ of the corporation immediately after the exchange.
- Boot (cash or other property) triggers gain recognition equal to the lesser of realized gain or boot received.
- §1032 — a corporation never recognizes gain or loss on the issuance of its own stock for cash or property.
- §1202 QSBS (pre-OBBBA, stock acquired on or before 7/4/2025): up to greater of $10M or 10× basis excluded; 5-year holding required; issuer gross-asset cap $50M.
- §1202 QSBS (post-OBBBA, stock acquired AFTER 7/4/2025): up to greater of $15M (indexed) or 10× basis; tiered holding period — 50% at 3 yrs, 75% at 4 yrs, 100% at 5 yrs; issuer gross-asset cap $75M.
- §1244 — ordinary loss (not capital) on small-business-stock losses up to $50K Single / $100K MFJ (unchanged by OBBBA).
- §163(j) business interest limit: 30% of ATI; OBBBA permanently restored the EBITDA-basis ATI add-back for depreciation/amortization starting 2025; small-business exception applies when 3-year average gross receipts ≤ $31M for 2025.
- §174 R&E: OBBBA fully restored immediate expensing for **domestic** R&E starting 2025; foreign R&E still 15-year amortization; a one-time election allows taxpayers to deduct or 2-year amortize unamortized 2022-2024 amounts.
- Corporate NOL: 80% of taxable income limit (TCJA, made permanent by OBBBA); no carryback (special 2-year carryback for farming, special insurance rules); indefinite carryforward.
- Corporate capital losses: deductible only against capital gains; carry back 3 years, forward 5 years (different from individuals).
- Corporate charitable contributions: 10% of taxable income limit; 5-year carryforward of excess.
Why This Matters for the Exam
Section 351 is the gateway to tax-free incorporation, but the EA exam also tests several related corporate provisions — most notably the OBBBA-expanded §1202 QSBS regime, the OBBBA-restored EBITDA-basis §163(j) ATI, and the OBBBA-restored §174 immediate expensing for domestic R&E. Expect multiple questions on these post-OBBBA changes.
Expect at least 3-4 questions on §351 and related provisions.
§351: The Basic Rule
Section 351: No gain or loss is recognized when:
| Requirement | Detail |
|---|---|
| Property transferred | To a corporation |
| In exchange for | Stock of the corporation |
| Control | Transferors have 80%+ control "immediately after" |
80% Control Defined
| Control Requirement | Threshold |
|---|---|
| Voting stock | 80% or more |
| Each class of nonvoting | 80% or more |
| Immediately after | Right after the exchange |
"Property" Definition
| Qualifies as Property | Does NOT Qualify |
|---|---|
| Cash | Services |
| Tangible property | Future services |
| Intangible property | Promissory notes by transferor |
| Accounts receivable | |
| Installment obligations |
Key Point: Services do not count for the 80% control test. If someone contributes only services, their stock is ignored when calculating if property transferors have 80% control.
Boot: Triggering Gain
Boot = Non-stock consideration received (cash or other property).
| Boot Received | Effect |
|---|---|
| Cash | Gain recognized |
| Other property | Gain recognized |
| Assumption of liability | Usually not boot (see exceptions) |
Gain Recognition with Boot
| Formula | Calculation |
|---|---|
| Realized gain | FMV received - Adjusted basis given |
| Recognized gain | Lesser of realized gain OR boot received |
| Loss | Not recognized even with boot |
Boot Example
| Item | Amount |
|---|---|
| Property basis | $20,000 |
| Property FMV | $100,000 |
| Stock received (FMV) | $90,000 |
| Cash received (boot) | $10,000 |
| Realized gain | $100,000 - $20,000 = $80,000 |
| Recognized gain | Lesser of $80,000 or $10,000 = $10,000 |
Liability Assumption
| Rule | Treatment |
|---|---|
| General rule | Liability assumed is NOT boot |
| Exception (§357(c)) | If liabilities assumed > total basis of property transferred, the excess is gain |
| Tax avoidance (§357(b)) | If principal purpose is tax avoidance = boot |
Shareholder's Basis in Stock
| Formula | Calculation |
|---|---|
| Basis of property transferred | $X |
| + Gain recognized | +$Y |
| - Boot received | -$Z |
| - Liabilities assumed | -$L |
| = Stock basis |
Corporation's Basis in Property
| Rule | Calculation |
|---|---|
| Carryover basis | Same as transferor's basis |
| + Gain recognized by transferor | Increase basis |
| = Corporation's basis |
§1032 — Stock Issuance by the Corporation
Independently of §351, a corporation never recognizes gain or loss on the issuance of its own stock in exchange for money or property. This applies to original issuance, treasury-stock transactions, and stock issued in §351 transfers. §1032 is unchanged.
§1202 — Qualified Small Business Stock (QSBS) — OBBBA EXPANSION
This is the biggest 2025 testable change in the C-corporation chapter. OBBBA significantly expanded §1202 for stock acquired after July 4, 2025. Both regimes coexist for years to come because of the rolling holding period.
Pre-OBBBA regime (stock acquired on or before July 4, 2025)
| Element | Rule |
|---|---|
| Per-issuer gain exclusion | Greater of $10M or 10× basis |
| Holding period | 5 years (100% exclusion for stock issued after 9/27/2010) |
| Older acquisitions | 50% (issued 8/11/1993-2/17/2009) or 75% (2/18/2009-9/27/2010) exclusion |
| Issuer aggregate gross-asset cap | $50,000,000 (at issuance) |
| AMT preference | 100% exclusion for QSBS issued after 9/27/2010 (no AMT add-back) |
| Corporate-form requirement | Domestic C corporation |
| Active business | 80% of assets used in qualifying trade or business |
| Excluded businesses | Financial services, professional services (health, law, engineering, accounting, etc.), farming, mining, hospitality |
Post-OBBBA regime (stock acquired AFTER July 4, 2025)
| Element | Rule |
|---|---|
| Per-issuer gain exclusion | Greater of $15M (indexed for inflation) or 10× basis |
| Tiered holding period | 50% exclusion at 3-year hold; 75% at 4-year hold; 100% at 5-year hold |
| Issuer aggregate gross-asset cap | $75,000,000 (at issuance) |
| AMT preference | 100% exclusion remains (no AMT add-back at 100% level) |
| Corporate-form requirement | Domestic C corporation (unchanged) |
| Active business | 80% of assets used in qualifying trade or business (unchanged) |
| Excluded businesses | Same exclusion list as pre-OBBBA |
Both regimes co-exist — taxpayers may hold pre-7/4/2025 and post-7/4/2025 §1202 stock simultaneously, and each tranche follows its own rules. The exam may test either regime or ask you to distinguish them by acquisition date.
§1244 — Ordinary Loss on Small Business Stock
| Element | Rule (unchanged for 2025) |
|---|---|
| Loss treatment | Ordinary (not capital) loss on sale or worthlessness |
| Annual limit | $50,000 Single; $100,000 MFJ |
| Issuer requirement | Aggregate capital + paid-in surplus ≤ $1,000,000 at time of issuance |
| Stock type | Common or preferred; must be originally issued to the loss-claiming shareholder |
§163(j) — Business Interest Limitation — OBBBA EBITDA-Basis ATI Restored
| Element | Rule for 2025 (post-OBBBA) |
|---|---|
| Limit | Deductible business interest expense = business interest income + 30% of ATI + floor-plan interest |
| ATI definition | EBITDA-basis — depreciation, amortization, and depletion are ADDED BACK in computing ATI (OBBBA permanently restored this starting 2025) |
| Prior 2022-2024 rule | EBIT-basis (no depreciation/amortization add-back) — less favorable; this old rule is GONE for 2025 |
| Small business exception | Average annual gross receipts test: ≤ $31,000,000 for 2025 (no §163(j) limit) |
| Disallowed interest | Carried forward indefinitely |
| Real property/farming election | Real-property trade or business and farming may elect out (must use ADS depreciation) |
The EBITDA-basis ATI is more favorable to taxpayers than the 2022-2024 EBIT-basis ATI because depreciation/amortization add-backs increase ATI, increasing the deductible interest limit. The exam will likely test recognition that 2025 returns use the EBITDA basis again.
§174 — R&E Expenditures — OBBBA Fully Restored Immediate Expensing for Domestic R&E
| Element | Rule for 2025 (post-OBBBA) |
|---|---|
| Domestic R&E | Fully restored to immediate expensing starting 2025 |
| Foreign R&E | Still required to be capitalized and amortized over 15 years |
| Catch-up for 2022-2024 capitalized R&E | OBBBA permits a one-time election to either (a) immediately deduct unamortized 2022-2024 domestic R&E or (b) amortize the remaining balance over 2 years |
| Software development | Treated as §174 R&E (same domestic vs foreign split applies) |
Pre-OBBBA (2022-2024): All R&E required 5-year (domestic) or 15-year (foreign) capitalization. OBBBA reversed the 5-year domestic capitalization starting 2025.
Corporate Net Operating Loss (NOL) — TCJA Rules Made Permanent by OBBBA
| Element | Rule for 2025 |
|---|---|
| Usage limit | 80% of taxable income (computed before the NOL) |
| Carryback | Generally NONE |
| Special carrybacks | 2 years for farming losses; 2 years for certain insurance company NOLs |
| Carryforward | Indefinite |
| Pre-2018 NOLs | Followed prior rules (2-year carryback / 20-year forward) and are not subject to the 80% limit |
Corporate Capital Losses
| Element | Rule (different from individuals) |
|---|---|
| Allowed against | ONLY capital gains (no $3,000 ordinary-income offset) |
| Carryback | 3 years |
| Carryforward | 5 years |
| Character on carryover | Short-term (regardless of original character) |
Corporate Charitable Contributions
| Element | Rule for 2025 |
|---|---|
| Annual limit | 10% of taxable income (computed without the charitable deduction, DRD, NOL carryback, and capital loss carryback) |
| Carryforward | 5 years |
| Accrual-method corps | May deduct contributions authorized by year-end and paid within 2½ months after year-end |
§269 — Acquisitions to Evade Tax
If the principal purpose of acquiring control of a corporation (or acquiring its assets with a carryover basis) is to evade or avoid federal income tax by securing a tax benefit otherwise unavailable, the IRS may disallow the benefit. This is a frequent companion to §382 limitations on NOL utilization following ownership changes.
Real-World Scenarios (TY 2025)
Scenario 1 — §351: Two individuals form a corporation in 2025. A contributes property (basis $50,000, FMV $80,000) for 70% of the stock and $5,000 cash. B contributes cash of $30,000 for 30% of the stock.
- Control test: A and B together own 100% → 80% control met.
- A's realized gain: $85,000 received - $50,000 basis = $35,000.
- A's recognized gain: Lesser of $35,000 or $5,000 = $5,000.
- A's stock basis: $50,000 - $5,000 (boot) + $5,000 (gain) = $50,000.
Scenario 2 — §1202 QSBS post-OBBBA: Investor buys $1,000,000 of QSBS in a domestic C corp on October 1, 2025 (after the OBBBA cut-off). Issuer's gross assets at issuance were $60,000,000 (≤ $75M cap met). Investor sells on October 2, 2028 (3-year hold) for $4,000,000.
- Gain: $3,000,000.
- Holding-period tier: 3 years → 50% exclusion.
- Excluded gain: $1,500,000.
- Taxable gain: $1,500,000 (long-term capital gain).
- If held to 2030 (5 years): 100% exclusion; entire $3M excluded.
On the Exam
Expect 3-4 questions spanning these provisions, typically:
- §351 Control: "What percentage ownership is required?"
- Boot: "How much gain is recognized?"
- §1202 QSBS — Post-OBBBA tiered holding: "Stock acquired Aug 2025, held 4 years — what exclusion?" (75%)
- §163(j) ATI: "Are depreciation and amortization added back in computing ATI for 2025?" (Yes — OBBBA restored EBITDA basis.)
- §174: "Are domestic R&E costs deductible immediately in 2025?" (Yes — OBBBA restored.)
- NOL/cap loss/charitable: Recall the 80% limit / 3-back-5-forward / 10% TI cap.
The key is to remember: 80% control for §351. Boot = lesser of realized gain or boot. §1202 post-7/4/2025 = $15M cap, tiered 50/75/100% at 3/4/5 yrs, $75M issuer cap. §163(j) ATI = EBITDA basis again. §174 domestic R&E = immediate expensing again.
What ownership percentage is required for §351 tax-free treatment?
Taxpayer transfers property (basis $30k, FMV $50k) for stock worth $45k and $5k cash. Recognized gain?
Do services count as "property" for the §351 control test?
Under the OBBBA-expanded §1202 QSBS rules, an investor purchases qualified small business stock in a domestic C corporation on August 15, 2025. After holding the stock for 4 years, the investor sells it. What percentage of the gain may be excluded from gross income?
For tax year 2025, how does §163(j) compute Adjusted Taxable Income (ATI) for purposes of the 30% business interest limitation?
Under OBBBA, how are domestic §174 research and experimental (R&E) expenditures treated for tax year 2025?