They could reset it unless, and this is an important "gotcha", you flew anything under 121 in July prior to your PT-turned-into-PC.

If you did not fly in July prior to your going non-current and then getting a PC you are in the same position as someone coming back from a medical.

If one the other hand you flew at all under 121 in the month of July before becoming non-qualified and doing the PC, then it would have to be considered to be your grace month so that you were qualified for the early July flying. (And before anyone jumps on the keyboard, someone could be flying as a the non-flying pilot for any number of reasons.)

Which leads to the big trap of using the grace month. Someone has a base month of June. The company schedules a grace month check ride on July 20th. The pilot does 121 flying early in July and then quits/gets sick/dies on the 19th. With no check ride actually taken on the 20th that can be shown as "June grace month" he is now retroactively illegal for the flying that was done in early July.

Very interesting, and makes perfect sense. No, I did not fly at all in July except for the 2 legs of IOE. So I guess that is why they can reset it.

Ok, but wait a minute - going off of your logic (which is good) accepting that my base month has been reset to July, then they still cannot technically use me this august (my new late grace) if they have no intention of giving me a check-ride in August because they are transitioning me off the equipment on Aug 30. This would be an abuse of the late grace, and retroactively I will not have been legal for any flying I end up doing in August - Correct? Thanks for chiming in 742Dash, and rickair.

That is correct -- you must have the check ride once you have operated in a grace month. However your employer would not be the first one to make this mistake.