Domestic Section 351 Transfers of Intellectual Property: The Law as It Is vs. The Law as the Commissioner Would Prefer It to Be
16 Journal of Corporate Taxation 99 (1989)
20 Pages Posted: 29 Dec 2013
Date Written: 1989
Section 351(a) applies only if there is a transfer of property to a corporation in exchange for the transferee’s stock or securities. I.e. "transfer" and "property" are critical requirements for qualifying under Section 351.
In the intellectual property area, the Service has sought to make the transfer requirement a substantial barrier to the availability of Section 351. However, the reported decisions have rejected the Service’s position in favor of an approach that treats virtually any complete or incomplete conveyance of a valuable item as sufficient, thus giving the transfer requirement a minimal role in determining the scope of Section 351. Since this position is consistent with the premises of Section 351 while the Service’s position is not, the Service should change its pronouncements to follow the taxpayer-favorable case law.
With respect to the property requirement, statutory and decisional law have created a situation in which services are excluded from the property classification, but the products of services, such as patents and trade secrets, are Section 351 property even though consideration received in exchange for patents and trade secrets by the creators of those items is effectively compensation for services rendered. This exclusion of services and inclusion of the products of services sets up a tension with respect to generic know-how that cannot be settled without drawing formalistic lines. An approach that treats generic know-how as Section 351 property only if it qualifies for substantial legal protection or is merely ancillary to a transfer of legally protected property provides a balanced and apparently administrable solution to this tension.
Keywords: corporate taxation, corporate formations, tax-free exchanges, non-taxable exchanges
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