 Hello and welcome to this session in which we will discuss section 351 specifically transfer of services. What is the big picture? What's the big idea here? Well under section 351 we have shareholders individuals that formed a corporation and what they contributed is money, cash or property and in return the corporation issued stocks they became owner in this corporation. Now if this transfer of property specifically was considered section 351 we don't have a taxable event simply put you contributed property in return you got stocks of this company the company that they formed the shareholders and right after the contribution these shareholders control the company and as a result section 351 kicks in and as a result it's not a taxable transaction that's fine this is what we learned so far about section 351. What happens now if some of the shareholder contributed services what does that mean? Let's take this individual here in this group and this individual don't have any money and don't have any property to contributed but this individual let's assume a young CPA motivated competent and they ask him to join but he does not have money so what they told this individual the CPA if you spend with our company one year will give you 10% of stocks so if you work for the company for one year we don't want you to contribute any money we want you to contribute your services what happened under those circumstances? Well this is a form of bartering I'm giving you my time you're giving me something in return well any form of bartering is taxable so when you provide the service it's a form of bartering and what's bartering bartering is when you exchange something for something else but we're not using cash for example these two individuals are bartering so it's a form of bartering therefore the service that this individual the value of the service is taxable so what we need to know is what happens when you provide services and property at the same time so what about if this individual they said yes I will work for the company but I do have some property some money some land some inventory I would like to contribute what happened under those circumstances would the transaction qualify under section 351 or not this is what we would learn in this session before we proceed any further I have a public announcement about my company foreheadlectures.com forehead accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses my CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles my accounting courses are aligned with your accounting courses broken down by chapter and topics my resources consist of lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today so let's go ahead and get started so the rules for transferring of services under section 351 it depends whether you are only transferring services under those circumstances the contribution is not counted under under section 351 simply put it's not counted toward the 80 percent control requirement because to have section 351 you have to have control after the transfer well if you only contributed services that percentages of the service does not count toward 80 percent control how about if you transfer both property and services you'd say okay here's my computer now I'm transferring property will my contribution now be be counted toward the 80 percent well the shareholder contribution will count toward the 80 percent if so you don't just contribute anything just any property well if the fair market value of the property that you contributed is a greater or equal to 10 percent of the fair market value of the service so the value of the property has to exceed a certain amount for the contribution to be counted toward the 80 percent control now what is that what is that amount well it has to be fair market value greater or equal to 10 percent of the fair market value of the service well the best way to illustrate this concept is to work few examples let's take a look at few illustration to understand this concept we have a individual a contributed property and received 60 percent of the stock right now owns 60 percent of the company b contributed services received 40 percent of the company stock and own 40 percent so a owns 60 b owns 40 after this transfer with section 351 applies under this scenario well remember that b transfer only service what did we learn about only service if b transfer only service this contribution don't count toward the 80 percent well if that's the case we're looking at a and b owning only 60 percent after the transaction well if they own 60 percent of the trend the transaction there's no section 351 therefore a will have to compute and recognize any taxes on the transfer of property and obviously b will have to pay taxes on the service provided on the fair market value of the service provided let's take a look at another trend transaction a contributed $60,000 worth of property owned 60 percent of the stock and received 60 percent and owned 60 percent of the company b contributed $1,000 in property $39,000 in service stock received 40 percent owns 40 percent so after this transfer a control 60 b control 40 well b here transfer both property and service does b contribution counted toward the 80 percent well let's find out b contributed $39,000 in service we have to multiply what's 10 percent of that that's $3,900 when it comes to the property the property contributed is less than 10 percent of the fair market value of service provided well as a result b's contribution is not counted toward the 40 percent therefore would back to square one a and b together own only 60 percent of the stock after this transaction therefore section 351 does not apply now remember b will have to pay taxes also on the service provided and the tax on the transfer of property is also applicable if there's a gain they have to pay gain on the property transferred let's take a look at another transaction a contributed $60,000 of property received 60 percent of stocks owned 60 percent of the company b contributed $10,000 of property $30,000 in service stock received 40 percent and owned 40 percent so after this transfer a owned 60 b owns 40 well a transferred property b transferred both services and property services is $30,000 well let's multiply this by 10 percent the 10 percent of the fair market value of services is $3,000 we see that the property is greater than $3,000 which is the 10 percent of the property what does that mean it means b contribution is counted toward the 80 percent well if b contribution is counted together they own 100 percent section 351 will applies and as a result a and b don't pay any taxes on property transferred however b will have to pay taxes on the services provided which is worth of $30,000 and that's considered ordinary income let's take a look at another transaction a contributed $80,000 of property received 80 percent of stocks owned currently 80 percent of the company after the transfer b contributed $1,000 of property $20,000 of service received 20 percent and after this transfer owned 20 percent so after this transfer is done a owns 80 percent of the company b owns 20 with this transaction classify under section 351 well a transferred property b both property and service let's take a look at the service 19,000 times 10 percent that's $1,900 well 1000 is less than 10 percent of the service of the property therefore b is not counted well it doesn't matter whether b counted or not after this transfer together they made this transfer a controls 80 percent of the of the company well they have control well as a result it does not really matter although b contribution is not counted that's fine a owns 80 percent therefore section 351 would apply therefore a and b don't pay taxes at any gains for the property transferred however b would still have to pay the taxes on the 19,000 of the service that's totally a different thing the 19,000 but for the property they don't have to pay any taxes now whether you are a CPA candidate enrolled agent or an accounting student i suggest you go to farhat lectures and work mcq's true false look at additional exercises that's gonna help you understand section 351 we're not done with section 351 we still have to look at when boot is involved we still have to look at when that is transferred with the property but it's very important to build your knowledge in section 351 step by step good luck study hard in the next session we would look at section 351 boot received section 351 liabilities assumed good luck study hard and of course stay safe