IRC Section 351: How Intellectual Property Can Be Transferred to a Corporation Without Triggering Tax

Key Takeaways

• IRC Section 351 enables tax-free transfers of intellectual property to a corporation when property is exchanged solely for stock and the transferor(s) maintain control immediately after the transaction, avoiding immediate gain recognition under the IRC.
• Improper structuring can trigger unexpected taxable gain, particularly where debt relief, contingent payments, royalties, or unclear IP assignments undermine the “solely for stock” requirement.
• Careful documentation and corporate formalities are critical to preserve nonrecognition treatment and avoid IRS scrutiny during internal IP restructurings or entity formation.

Moving intellectual property between owners and entities may sound simple and routine, but there are a few deceptive tax pitfalls that may arise. For transfers of IP involving entities under common ownership, Section 351 of the Internal Revenue Code keeps such transfers tax neutral and avoids triggering the recognition of gain or loss upon the conveyance of IP.

In short, I.R.C. Section 351 allows property, like copyrights, publishing rights, scripts, trademarks, and other IP, to be transferred to a corporation without immediate tax recognition, so long as the transferor(s) control the corporation immediately after the exchange.

Typical instances where the provision applies:

• An author or artist assigning their work to a wholly owned corporate entity or liability protection and centralized licensing.
• A production company dissolving an IP-holding subsidiary and consolidating its rights into a holding company.
• A content creator transferring their content into a wholly owned corporate entity for monetization and enforcement purposes.

When structured properly, these transactions are typically accomplished entirely through assignment and contribution instruments, and without immediate income tax consequences.

Section 351’s “Solely in Exchange for Stock” Requirement

Section 351 only applies when property is transferred “solely in exchange for stock” in such corporation. As a result, the section may not apply if the transfer includes any reduction of debt, side agreements, contingent payments, or even poorly drafted “royalty” arrangements. Similarly, unclear IP assignments, such as grants of partial rights, unclear scope, or defective chains of title, can also undermine the nonrecognition of tax afforded by Section 351.

Proper Documentation to Preserve Tax-Free Treatment

Transferors should also be consistent when documenting transfers of IP for purposes of Section 351. For instance, best practices typically include ensuring a clear assignment of IP to the corporation under a contribution or exchange agreement expressly invoking Section 351 (with the consideration limited solely to stock), along with any requisite corporate approvals and consents.

Avoiding Tax Surprises in Internal IP Transfers

While internal transfers of IP may seem like a simple matter of assignment, there are various considerations and mechanics required to avoid any tax surprises. Section 351 is a quiet provision that is often overlooked, but is the backbone of any internal restructuring or internal transfers of IP.

For more information on navigating Section 351, please contact AGG Tax of counsel Hanish Patel.