8169 / How is the contribution of complete ownership of all rights to intellectual property to a corporation in exchange for a controlling interest in that corporation treated for income tax purposes?

In some cases, the owner of intellectual property may wish to transfer ownership of that property to a corporation or other business entity in order to obtain the benefits that corporate ownership can confer, or to conduct a business through that entity. IRC Section 351 provides that gain or loss on the transfer of property to a corporation will not be recognized if such property is transferred in exchange for stock in the corporation.

While other limitations apply, the nonrecognition treatment under Section 351 only applies when the transferor (or multiple transferors) owns at least 80 percent of the stock of the transferee company immediately after the transfer, as measured by voting power and by each class of nonvoting stock.¹ However, if property or cash is exchanged (in addition to the corporate stock), gain will be recognized to the extent of the value of the property or the amount of cash involved in the exchange.²

Therefore, assuming this control test is satisfied, the contribution of legal ownership, including all substantial rights to the intellectual property, should qualify for nonrecognition treatment and no gain or loss will be recognized upon contribution to a corporation (or a partnership for similar reasons under Section 721) in exchange for its stock.

See Q 8170 for a discussion of the results if less than all substantial rights to the intellectual property are transferred.