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 368 control test
Meaning
Benchmark for qualification in tax free reorganizations based on stock ownership. A section 368 control test defines the minimum level of interest a group must hold to avoid immediate tax on a corporate shift. It measures both the decision making power and the economic stake held by the participants.
Voting Power
Assessment of control starts with the total percentage of shares that have the right to elect directors. The section 368 control test requires the transferors to hold at least eighty percent of the combined voting power of all classes of stock. This high threshold ensures that the transaction is a genuine restructuring of an existing interest rather than a disguised sale to new parties.
Ownership Measurement
Calculation of the stake must also include non voting shares to meet the regulatory standard. Under the section 368 control test, the participants must own at least eighty percent of the total number of shares of all other classes of stock. This measurement is performed class by class rather than in the aggregate to ensure broad control across the entire capital structure.
Subsequent Sale
Duration of the control is a factor in determining if the reorganization was valid from its inception. If the founders fail the section 368 control test because of a prearranged plan to sell their stock immediately after the deal, the tax free status is revoked. The ownership must be held with the intent of continuing the business in its new form.