Drafting Section 351 Consideration Clauses For Early Software Assets
Section 351 consideration clauses transfer early software assets as tax-free property exchanges when incorporators maintain eighty percent corporate voting control.
Section 368c
Meaning
Statutory tax provisions define the ownership threshold required to establish corporate control for federal tax purposes. Section 368c defines control as the ownership of stock possessing at least eighty percent of total combined voting power of all classes of voting stock and at least eighty percent of the total number of shares of all other classes of stock. Satisfying this quantitative standard is mandatory for tax-free corporate formations under section 351 and corporate reorganizations under section 368.
Voting Calculation
Determination of voting power depends on the legal right to elect corporate directors rather than overall economic equity interest. Shares possessing conditional voting rights count toward the voting power metric under Section 368c only when the voting contingency has occurred.
Class Distribution
Non-voting stock rules require transferors to meet the eighty percent ownership threshold across every non-voting stock class independently. Owning eighty percent of total non-voting shares in aggregate does not satisfy the statute if ownership in any single non-voting class falls below eighty percent. IRS rulings enforce strict class-by-class testing for preferred stock, tracking stock, and non-voting common equity.
Corporate capital structures featuring multiple share classes must track ownership ratios class by class during equity issuances.
Reorganization Application
Corporate acquisitions and recapitalizations rely on the statutory definition to maintain tax-free status for qualifying stock exchanges. Failure to meet the control standard exposes target shareholders to immediate tax liability on appreciated shares.