section 351 exchange

Control Group Rule

Qualifying for tax deferral requires the contributing transferors to own at least eighty percent of total combined voting power and total shares immediately after the transaction. All individuals transferring property as part of a single coordinated plan constitute the statutory control group. If an equity recipient contributes pure services rather than property, their shares cannot count toward the eighty percent control threshold.

Failing this control test renders the entire asset transfer a taxable transaction for all participants.

Property Distinction

Tax codes draw sharp distinctions between transferred property assets and performed personal services. Intellectual property, trade secrets, software code, and physical equipment qualify as eligible property under the statute. Conversely, agreements to provide future management or past advisory services do not constitute property transfers.

Mixing service compensation with property transfers requires careful allocation to avoid disqualifying the tax-deferred status of the transaction.

Tax Nonrecognition

Qualifying exchanges defer capital gains taxation by transferring the contributor’s original asset cost basis into the newly issued corporate shares. The corporation inherits the contributor’s historic tax basis in the property, while the founder takes that same basis in their stock. This statutory mechanism permits founders to incorporate valuable software assets without incurring immediate tax liabilities.