Section 351 of the Internal Revenue Code is one of the foundational nonrecognition provisions in U.S. tax law. It allows taxpayers to transfer property to a corporation in exchange for stock without recognizing gain or loss at the time of the transfer — a critical tool for business formations, restructurings, and asset contributions. But when the transferee corporation is a foreign entity, Section 351's tax-free treatment collides with Section 367, which systematically overrides nonrecognition for outbound transfers. What looks like a clean, tax-free reorganization can become a fully taxable event the moment a foreign corporation enters the picture.

For LATAM families and international investors restructuring U.S. and offshore business holdings, the interaction between Section 351 and Section 367 is one of the most consequential — and most frequently misunderstood — areas of U.S. international tax law. Getting the analysis wrong can trigger immediate gain recognition on built-in appreciation that was expected to transfer tax-free.

What Section 351 Does — The Basic Rule

Under Section 351 of the Internal Revenue Code, no gain or loss is recognized when property is transferred to a corporation solely in exchange for stock of that corporation, provided that the transferors are in "control" of the corporation immediately after the exchange. Control means owning at least 80% of the total combined voting power and at least 80% of the total number of shares of all other classes of stock.

Section 351 is the foundational nonrecognition rule for corporate formations and restructurings. Without it, every contribution of appreciated property to a corporation would be a taxable event — the transferor would recognize gain equal to the difference between the fair market value of the stock received and the basis of the property contributed. Section 351 defers that gain until the transferor sells the stock, or the corporation sells the contributed property, whichever comes first.

The transferor's basis in the stock received equals the basis of the property contributed, adjusted for any boot received. The corporation takes a carryover basis in the contributed property equal to the transferor's pre-contribution basis. Neither the transferor nor the corporation recognizes gain at the time of the contribution.

Boot and Its Consequences

"Boot" is any consideration received in the exchange other than stock of the transferee corporation — cash, notes, other property, or the assumption of liabilities in excess of basis. Boot triggers gain recognition to the extent of its fair market value, up to the amount of built-in gain on the contributed property.

The liability assumption rule under Section 357 is a common trap. In general, if the corporation assumes liabilities of the transferor as part of a Section 351 exchange, those assumed liabilities do not constitute boot — they are not treated as consideration received by the transferor. But there are exceptions: if the assumption of liabilities lacks a business purpose or is done to avoid tax, or if the total liabilities assumed exceed the total basis of the property contributed, the excess is treated as gain.

The excess-liabilities rule (Section 357(c)) is particularly relevant for real estate transfers. A building with a $1M fair market value, a $600K mortgage, and a $100K basis presents a problem: the $600K mortgage exceeds the $100K basis by $500K, which is recognized as gain even though the building itself was transferred in what would otherwise be a tax-free exchange.

The Section 367 Problem — International Transfers

Section 351 applies to transfers to both domestic and foreign corporations, but Section 367 overrides the nonrecognition rule when property is transferred to a foreign corporation. Section 367(a) provides that, for purposes of Section 351 (and other nonrecognition provisions), a foreign corporation is not treated as a corporation — meaning the transferor recognizes gain on the transfer as if it were a taxable sale.

The practical effect: a U.S. person who contributes appreciated property (stock, real estate, IP, a business) to a newly formed or existing foreign corporation triggers immediate gain recognition under Section 367(a), even though the transfer would be tax-free if made to a domestic corporation.

There are exceptions to Section 367(a) recognition, but they are narrow and require affirmative elections and filings. The most important is the "gain recognition agreement" (GRA): a U.S. transferor can avoid immediate Section 367(a) recognition by entering into a gain recognition agreement with the IRS, agreeing to recognize gain if certain triggering events occur within a specified period (generally five years). The GRA is filed on Form 8838 and requires careful maintenance throughout the agreement period.

Section 367(d) and Intangible Property

Section 367(d) applies a separate, more aggressive regime to outbound transfers of intangible property (IP) to foreign corporations. Instead of gain recognition at the time of transfer, Section 367(d) requires the U.S. transferor to include in income, annually over the useful life of the IP, amounts that represent the "appropriate" royalty that a related party would pay for the IP — essentially an annual deemed royalty income stream regardless of whether any royalty is actually paid.

This treatment applies to patents, copyrights, trademarks, trade names, franchises, and goodwill — any property whose value stems from its intangible nature. The income inclusion continues throughout the remaining useful life of the intangible, which for goodwill and going concern value can be indefinite.

For LATAM businesses with valuable IP (brand names, software, proprietary processes) who are restructuring their global IP ownership structure to a foreign holding company, Section 367(d) creates a long-term income tax cost that can significantly outweigh the non-tax advantages of offshore IP ownership.

Form 926 Reporting Obligations

U.S. persons who transfer property to a foreign corporation in a Section 351 exchange must file Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation) with their annual income tax return for the year of the transfer. The form is required regardless of whether the transfer triggers gain recognition — it is a mandatory disclosure.

Penalties for failure to file Form 926 are severe: 10% of the fair market value of the transferred property, up to $100,000 per transfer (with no cap if the failure was intentional). These penalties are assessed even if no tax was due because gain recognition was deferred under a GRA.

Form 926 must be filed with the transferor's income tax return (not separately), and the statute of limitations on the return does not begin to run until the form is filed — creating an indefinite open statute of limitations risk for transfers that are not timely reported.

Planning Implications for Cross-Border Restructurings

Section 351 and Section 367 together define the playing field for any restructuring involving the movement of assets into a foreign corporate structure. For LATAM families or businesses restructuring their U.S. and offshore holdings, the analysis must address: (a) whether the contributed property has built-in gain; (b) whether the transferee is a domestic or foreign corporation; (c) if foreign, whether the transfer qualifies for a GRA and whether maintaining a GRA is practical; and (d) for IP, whether Section 367(d)'s deemed royalty regime is preferable to alternatives (like licensing arrangements or cost-sharing agreements).

The right structure depends on the specific asset, the amount of built-in gain, the anticipated holding period, and the long-term operational plan. A foreign holding company that makes sense from an estate planning or liability protection perspective may not be viable from a tax perspective if the cost of Section 367(a) recognition at formation is prohibitive.

The gap between domestic and international treatment under Section 367 is not a technicality — it is a structural feature of U.S. international tax law that requires deliberate planning before any asset contribution to a foreign entity. Engaging tax counsel early in the structuring process, before transactions are documented and executed, is the only way to ensure that the nonrecognition treatment the parties expect will actually be available.