IRC Section 351 Compliance When Exchanging Unvalued Intellectual Property
Tax nonrecognition under Section 351 requires transferring legal title of intangible property rather than services or nonexclusive rights to a controlled corporation.
Revenue Ruling 69 156
Meaning
Administrative guidance clarifies whether a grant of rights in intellectual property constitutes a transfer of property for the purposes of corporate formation rules. The revenue ruling 69 156 establishes that a transfer must include all substantial rights to qualify for nonrecognition treatment. It bridges the gap between general property law and specific corporate tax codes.
The ruling dictates that if a transferor retains any significant power, the exchange is a license.
Property Recognition
Defining what counts as property is the core function of this guidance. Under the revenue ruling 69 156, a transfer only qualifies for tax-free status if it would also qualify as a sale or exchange in a taxable transaction. This means the corporation must receive the right to use or sell the asset without interference.
If the founder keeps the right to use the patent in a specific country, the property has not been fully transferred. This ruling prevents founders from carving up assets and treating each piece as a separate capital contribution. It ensures that the corporation truly owns the asset it claims to possess.
The ruling provides a clear test for intellectual property contributions.
License Distinction
A grant of rights that is less than total is classified as a license. The revenue ruling 69 156 makes it clear that license agreements do not satisfy the property requirement of the tax code. This distinction is vital for accurate corporate tax reporting.
Transfer Completion
The transfer must be absolute for the tax deferral to apply. The revenue ruling 69 156 requires the founder to walk away from the asset entirely. This ensures that the corporation has the full economic benefit of the contribution.
It prevents the founder from maintaining a secret string on the technology.