Early Unpriced Software Transfers Under Section 351 Non Recognition Rules
Section 351 defers taxable gain when unpriced software property transfers for equity if contributors retain eighty percent control immediately after exchange.
Section 362 carryover basis
Meaning
Valuation rule for corporate assets received during an exchange of property for stock. A section 362 carryover basis requires the entity to record the asset at the same tax cost the founder originally held. This continuity prevents the corporation from resetting the depreciation schedule or inflating the value for tax purposes.
Transactional Flow
Founders transfer their assets and the corporation takes the items along with their tax history. The section 362 carryover basis applies regardless of the current fair market value of the equipment or intellectual property. This rule ensures that the potential tax on the appreciation of the asset remains within the corporate structure.
Gain Adjustment
Increase in the corporate basis only occurs if the founder is forced to recognize a gain during the transfer. If a section 362 carryover basis is applied to an exchange where the founder received boot, the corporation increases the asset basis by the amount of gain the founder reported. This adjustment prevents the same gain from being taxed twice when the corporation eventually sells the asset.
Depreciation Impact
Deductions for the exhaustion of the asset are calculated based on the original cost rather than the fair market value at the time of the transfer. The section 362 carryover basis limits the ability of the organization to reduce its taxable income through high non cash expenses. If the founder had already fully depreciated the equipment, the corporation receives no further tax benefits from the usage of that property.