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.
Section 368 c control
Meaning
Corporate reorganizations and formations require a precise level of stock ownership to ensure the transaction maintains continuity of interest. The section 368 c control standard defines this state as the ownership of stock possessing at least eighty percent of the total combined voting power. It also requires the ownership of at least eighty percent of the total number of shares of all other classes of stock.
This definition is the primary yardstick for determining the validity of tax-free swaps.
Voting Threshold
Power in a corporation is measured by the ability to elect directors and influence major decisions. Under the section 368 c control definition, the voting power must be held directly by the group transferring the property. This measurement is not just a count of shares but an analysis of the rights attached to those shares.
If the stock has limited voting rights or if the rights are contingent on future events, the threshold might not be reached. The calculation must be precise because falling even one percent short triggers a taxable event for every participant. This high bar ensures that only substantial shifts in ownership qualify for special tax status.
It protects the integrity of the corporate structure.
Stock Measurement
Every class of non-voting stock must also meet the eighty percent requirement individually. The section 368 c control rule does not allow for averaging across different types of shares. This prevents the use of complex stock structures to bypass ownership limits.
Qualification Boundary
This definition sets the limits for when a company can be part of a larger tax-advantaged group. The section 368 c control rule is used to determine if a subsidiary can be liquidated or merged without tax. It acts as the foundation for the entire system of corporate tax deferral.
This boundary is strictly enforced by the tax authorities.