Video Summary

Section 351 of the Internal Revenue Code governs tax-free incorporations. It allows shareholders to transfer property to a newly formed corporation in exchange for its stock without triggering immediate tax consequences on the transferred assets. This means no capital gains or losses are recognized at the time of incorporation. However, this tax deferral is contingent upon several key conditions. The transferors must be in control of the corporation immediately after the exchange, meaning they own at least 80% of the total voting power and at least 80% of the total value of all other classes of stock. The property transferred can include cash, assets, and liabilities. The liabilities assumed by the corporation generally reduce the amount of stock considered received by the transferor. Specific rules apply to debt, and boot (e.g., cash or other property received in addition to stock) triggers a taxable gain to the extent of its value. Careful planning is essential to ensure compliance with Section 351 and its detailed requirements, as failing to meet these conditions can result in unwanted tax implications for the shareholders.