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.
§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
Question types to practice across these provisions:
- §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?
50%
51%
80%
100%
Taxpayer transfers property (basis $30k, FMV $50k) for stock worth $45k and $5k cash. Recognized gain?
$0
$5,000
$15,000
$20,000
Do services count as "property" for the §351 control test?
Yes, always
Yes, if valued over $10,000
No, services are not property
Only if agreed in writing
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?
0% — only 5-year holds qualify
50%
75%
100%
For tax year 2025, how does §163(j) compute Adjusted Taxable Income (ATI) for purposes of the 30% business interest limitation?
EBIT basis — depreciation and amortization are NOT added back
EBITDA basis — depreciation, amortization, and depletion are added back
Cash basis only
§163(j) was repealed by OBBBA
Under OBBBA, how are domestic §174 research and experimental (R&E) expenditures treated for tax year 2025?
Must be capitalized and amortized over 5 years
Must be capitalized and amortized over 15 years
Fully restored to immediate expensing in the year incurred
Treated as a §1202 exclusion item
Sections you finish are checked off in the contents.