Subchapter C - Corporate Distributions and Adjustments

TITLE 26 - US CODE - PART I - DISTRIBUTIONS BY CORPORATIONS

Subpart A - Effects on Recipients

26 USC 301 - Distributions of property

(a) In general 
Except as otherwise provided in this chapter, a distribution of property (as defined in section 317 (a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c).
(b) Amount distributed 

(1) General rule 
For purposes of this section, the amount of any distribution shall be the amount of money received, plus the fair market value of the other property received.
(2) Reduction for liabilities 
The amount of any distribution determined under paragraph (1) shall be reduced (but not below zero) by
(A) the amount of any liability of the corporation assumed by the shareholder in connection with the distribution, and
(B) the amount of any liability to which the property received by the shareholder is subject immediately before, and immediately after, the distribution.
(3) Determination of fair market value 
For purposes of this section, fair market value shall be determined as of the date of the distribution.
(c) Amount taxable 
In the case of a distribution to which subsection (a) applies
(1) Amount constituting dividend 
That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income.
(2) Amount applied against basis 
That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock.
(3) Amount in excess of basis 

(A) In general 
Except as provided in subparagraph (B), that portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of property.
(B) Distributions out of increase in value accrued before March 1, 1913 
That portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock and to the extent that it is out of increase in value accrued before March 1, 1913, shall be exempt from tax.
(d) Basis 
The basis of property received in a distribution to which subsection (a) applies shall be the fair market value of such property.
(e) Special rule for certain distributions received by 20 percent corporate shareholder 

(1) In general 
Except to the extent otherwise provided in regulations, solely for purposes of determining the taxable income of any 20 percent corporate shareholder (and its adjusted basis in the stock of the distributing corporation), section 312 shall be applied with respect to the distributing corporation as if it did not contain subsections (k) and (n) thereof.
(2) 20 percent corporate shareholder 
For purposes of this subsection, the term 20 percent corporate shareholder means, with respect to any distribution, any corporation which owns (directly or through the application of section 318)
(A) stock in the corporation making the distribution possessing at least 20 percent of the total combined voting power of all classes of stock entitled to vote, or
(B) at least 20 percent of the total value of all stock of the distributing corporation (except nonvoting stock which is limited and preferred as to dividends),

but only if, but for this subsection, the distributee corporation would be entitled to a deduction under section 243, 244, or 245 with respect to such distribution.

(3) Application of section 312 (n)(7) not affected 
The reference in paragraph (1) to subsection (n) of section 312 shall be treated as not including a reference to paragraph (7) of such subsection.
(4) Regulations 
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.
(f) Special rules 

(1) For distributions in redemption of stock, see section 302.
(2) For distributions in complete liquidation, see part II (sec. 331 and following).
(3) For distributions in corporate organizations and reorganizations, see part III (sec. 351 and following).
(4) For taxation of dividends received by individuals at capital gain rates, see section 1 (h)(11).

26 USC 302 - Distributions in redemption of stock

(a) General rule 
If a corporation redeems its stock (within the meaning of section 317 (b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.
(b) Redemptions treated as exchanges 

(1) Redemptions not equivalent to dividends 
Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.
(2) Substantially disproportionate redemption of stock 

(A) In general 
Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder.
(B) Limitation 
This paragraph shall not apply unless immediately after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote.
(C) Definitions 
For purposes of this paragraph, the distribution is substantially disproportionate if
(i) the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time, is less than 80 percent of
(ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time. For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholders ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence. For purposes of the preceding sentence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value.
(D) Series of redemptions 
This paragraph shall not apply to any redemption made pursuant to a plan the purpose or effect of which is a series of redemptions resulting in a distribution which (in the aggregate) is not substantially disproportionate with respect to the shareholder.
(3) Termination of shareholder’s interest 
Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.
(4) Redemption from noncorporate shareholder in partial liquidation 
Subsection (a) shall apply to a distribution if such distribution is
(A) in redemption of stock held by a shareholder who is not a corporation, and
(B) in partial liquidation of the distributing corporation.
(5) Application of paragraphs 
In determining whether a redemption meets the requirements of paragraph (1), the fact that such redemption fails to meet the requirements of paragraph (2), (3), or (4) shall not be taken into account. If a redemption meets the requirements of paragraph (3) and also the requirements of paragraph (1), (2), or (4), then so much of subsection (c)(2) as would (but for this sentence) apply in respect of the acquisition of an interest in the corporation within the 10-year period beginning on the date of the distribution shall not apply.
(c) Constructive ownership of stock 

(1) In general 
Except as provided in paragraph (2) of this subsection, section 318 (a) shall apply in determining the ownership of stock for purposes of this section.
(2) For determining termination of interest 

(A) In the case of a distribution described in subsection (b)(3), section 318(a)(1) shall not apply if
(i) immediately after the distribution the distributee has no interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor,
(ii) the distributee does not acquire any such interest (other than stock acquired by bequest or inheritance) within 10 years from the date of such distribution, and
(iii) the distributee, at such time and in such manner as the Secretary by regulations prescribes, files an agreement to notify the Secretary of any acquisition described in clause (ii) and to retain such records as may be necessary for the application of this paragraph.

If the distributee acquires such an interest in the corporation (other than by bequest or inheritance) within 10 years from the date of the distribution, then the periods of limitation provided in sections 6501 and 6502 on the making of an assessment and the collection by levy or a proceeding in court shall, with respect to any deficiency (including interest and additions to the tax) resulting from such acquisition, include one year immediately following the date on which the distributee (in accordance with regulations prescribed by the Secretary) notifies the Secretary of such acquisition; and such assessment and collection may be made notwithstanding any provision of law or rule of law which otherwise would prevent such assessment and collection.

(B) Subparagraph (A) of this paragraph shall not apply if
(i) any portion of the stock redeemed was acquired, directly or indirectly, within the 10-year period ending on the date of the distribution by the distributee from a person the ownership of whose stock would (at the time of distribution) be attributable to the distributee under section 318 (a), or
(ii) any person owns (at the time of the distribution) stock the ownership of which is attributable to the distributee under section 318 (a) and such person acquired any stock in the corporation, directly or indirectly, from the distributee within the 10-year period ending on the date of the distribution, unless such stock so acquired from the distributee is redeemed in the same transaction.

The preceding sentence shall not apply if the acquisition (or, in the case of clause (ii), the disposition) by the distributee did not have as one of its principal purposes the avoidance of Federal income tax.

(C) Special rule for waivers by entities 

(i) In general Subparagraph (A) shall not apply to a distribution to any entity unless
(I) such entity and each related person meet the requirements of clauses (i), (ii), and (iii) of subparagraph (A), and
(II) each related person agrees to be jointly and severally liable for any deficiency (including interest and additions to tax) resulting from an acquisition described in clause (ii) of subparagraph (A).

In any case to which the preceding sentence applies, the second sentence of subparagraph (A) and subparagraph (B)(ii) shall be applied by substituting distributee or any related person for distributee each place it appears.

(ii) Definitions For purposes of this subparagraph
(I) the term entity means a partnership, estate, trust, or corporation; and
(II) the term related person means any person to whom ownership of stock in the corporation is (at the time of the distribution) attributable under section 318 (a)(1) if such stock is further attributable to the entity under section 318 (a)(3).
(d) Redemptions treated as distributions of property 
Except as otherwise provided in this subchapter, if a corporation redeems its stock (within the meaning of section 317 (b)), and if subsection (a) of this section does not apply, such redemption shall be treated as a distribution of property to which section 301 applies.
(e) Partial liquidation defined 

(1) In general 
For purposes of subsection (b)(4), a distribution shall be treated as in partial liquidation of a corporation if
(A) the distribution is not essentially equivalent to a dividend (determined at the corporate level rather than at the shareholder level), and
(B) the distribution is pursuant to a plan and occurs within the taxable year in which the plan is adopted or within the succeeding taxable year.
(2) Termination of business 
The distributions which meet the requirements of paragraph (1)(A) shall include (but shall not be limited to) a distribution which meets the requirements of subparagraphs (A) and (B) of this paragraph:
(A) The distribution is attributable to the distributing corporations ceasing to conduct, or consists of the assets of, a qualified trade or business.
(B) Immediately after the distribution, the distributing corporation is actively engaged in the conduct of a qualified trade or business.
(3) Qualified trade or business 
For purposes of paragraph (2), the term qualified trade or business means any trade or business which
(A) was actively conducted throughout the 5-year period ending on the date of the redemption, and
(B) was not acquired by the corporation within such period in a transaction in which gain or loss was recognized in whole or in part.
(4) Redemption may be pro rata 
Whether or not a redemption meets the requirements of subparagraphs (A) and (B) of paragraph (2) shall be determined without regard to whether or not the redemption is pro rata with respect to all of the shareholders of the corporation.
(5) Treatment of certain pass-thru entities 
For purposes of determining under subsection (b)(4) whether any stock is held by a shareholder who is not a corporation, any stock held by a partnership, estate, or trust shall be treated as if it were actually held proportionately by its partners or beneficiaries.
(f) Cross references 
For special rules relating to redemption
(1) Death Taxes.— 
Of stock to pay death taxes, see section 303.
(2) Section 306 Stock.— 
Of section 306 stock, see section 306.
(3) Liquidations.— 
Of stock in complete liquidation, see section 331.

26 USC 303 - Distributions in redemption of stock to pay death taxes

(a) In general 
A distribution of property to a shareholder by a corporation in redemption of part or all of the stock of such corporation which (for Federal estate tax purposes) is included in determining the gross estate of a decedent, to the extent that the amount of such distribution does not exceed the sum of
(1) the estate, inheritance, legacy, and succession taxes (including any interest collected as a part of such taxes) imposed because of such decedents death, and
(2) the amount of funeral and administration expenses allowable as deductions to the estate under section 2053 (or under section 2106 in the case of the estate of a decedent nonresident, not a citizen of the United States),

shall be treated as a distribution in full payment in exchange for the stock so redeemed.

(b) Limitations on application of subsection (a) 

(1) Period for distribution 
Subsection (a) shall apply only to amounts distributed after the death of the decedent and
(A) within the period of limitations provided in section 6501 (a) for the assessment of the Federal estate tax (determined without the application of any provision other than section 6501 (a)), or within 90 days after the expiration of such period,
(B) if a petition for redetermination of a deficiency in such estate tax has been filed with the Tax Court within the time prescribed in section 6213, at any time before the expiration of 60 days after the decision of the Tax Court becomes final, or
(C) if an election has been made under section 6166 and if the time prescribed by this subparagraph expires at a later date than the time prescribed by subparagraph (B) of this paragraph, within the time determined under section 6166 for the payment of the installments.
(2) Relationship of stock to decedent’s estate 

(A) In general 
Subsection (a) shall apply to a distribution by a corporation only if the value (for Federal estate tax purposes) of all of the stock of such corporation which is included in determining the value of the decedents gross estate exceeds 35 percent of the excess of
(i) the value of the gross estate of such decedent, over
(ii) the sum of the amounts allowable as a deduction under section 2053 or 2054.
(B) Special rule for stock of two or more corporations 
For purposes of subparagraph (A), stock of 2 or more corporations, with respect to each of which there is included in determining the value of the decedents gross estate 20 percent or more in value of the outstanding stock, shall be treated as the stock of a single corporation. For purposes of the 20-percent requirement of the preceding sentence, stock which, at the decedents death, represents the surviving spouses interest in property held by the decedent and the surviving spouse as community property or as joint tenants, tenants by the entirety, or tenants in common shall be treated as having been included in determining the value of the decedents gross estate.
(3) Relationship of shareholder to estate tax 
Subsection (a) shall apply to a distribution by a corporation only to the extent that the interest of the shareholder is reduced directly (or through a binding obligation to contribute) by any payment of an amount described in paragraph (1) or (2) of subsection (a).
(4) Additional requirements for distributions made more than 4 years after decedent’s death 
In the case of amounts distributed more than 4 years after the date of the decedents death, subsection (a) shall apply to a distribution by a corporation only to the extent of the lesser of
(A) the aggregate of the amounts referred to in paragraph (1) or (2) of subsection (a) which remained unpaid immediately before the distribution, or
(B) the aggregate of the amounts referred to in paragraph (1) or (2) of subsection (a) which are paid during the 1-year period beginning on the date of such distribution.
(c) Stock with substituted basis 
If
(1) a shareholder owns stock of a corporation (referred to in this subsection as new stock) the basis of which is determined by reference to the basis of stock of a corporation (referred to in this subsection as old stock),
(2) the old stock was included (for Federal estate tax purposes) in determining the gross estate of a decedent, and
(3) subsection (a) would apply to a distribution of property to such shareholder in redemption of the old stock,

then, subject to the limitation specified in subsection (b), subsection (a) shall apply in respect of a distribution in redemption of the new stock.

(d) Special rules for generation-skipping transfers 
Where stock in a corporation is the subject of a generation-skipping transfer (within the meaning of section 2611 (a)) occurring at the same time as and as a result of the death of an individual
(1) the stock shall be deemed to be included in the gross estate of such individual;
(2) taxes of the kind referred to in subsection (a)(1) which are imposed because of the generation-skipping transfer shall be treated as imposed because of such individuals death (and for this purpose the tax imposed by section 2601 shall be treated as an estate tax);
(3) the period of distribution shall be measured from the date of the generation-skipping transfer; and
(4) the relationship of stock to the decedents estate shall be measured with reference solely to the amount of the generation-skipping transfer.

26 USC 304 - Redemption through use of related corporations

(a) Treatment of certain stock purchases 

(1) Acquisition by related corporation (other than subsidiary) 
For purposes of sections 302 and 303, if
(A) one or more persons are in control of each of two corporations, and
(B) in return for property, one of the corporations acquires stock in the other corporation from the person (or persons) so in control,

then (unless paragraph (2) applies) such property shall be treated as a distribution in redemption of the stock of the corporation acquiring such stock. To the extent that such distribution is treated as a distribution to which section 301 applies, the transferor and the acquiring corporation shall be treated in the same manner as if the transferor had transferred the stock so acquired to the acquiring corporation in exchange for stock of the acquiring corporation in a transaction to which section 351 (a) applies, and then the acquiring corporation had redeemed the stock it was treated as issuing in such transaction.

(2) Acquisition by subsidiary 
For purposes of sections 302 and 303, if
(A) in return for property, one corporation acquires from a shareholder of another corporation stock in such other corporation, and
(B) the issuing corporation controls the acquiring corporation,

then such property shall be treated as a distribution in redemption of the stock of the issuing corporation.

(b) Special rules for application of subsection (a) 

(1) Rules for determinations under section 302 (b) 
In the case of any acquisition of stock to which subsection (a) of this section applies, determinations as to whether the acquisition is, by reason of section 302 (b), to be treated as a distribution in part or full payment in exchange for the stock shall be made by reference to the stock of the issuing corporation. In applying section 318 (a) (relating to constructive ownership of stock) with respect to section 302 (b) for purposes of this paragraph, sections 318 (a)(2)(C) and 318 (a)(3)(C) shall be applied without regard to the 50 percent limitation contained therein.
(2) Amount constituting dividend 
In the case of any acquisition of stock to which subsection (a) applies, the determination of the amount which is a dividend (and the source thereof) shall be made as if the property were distributed
(A) by the acquiring corporation to the extent of its earnings and profits, and
(B) then by the issuing corporation to the extent of its earnings and profits.
(3) Coordination with section 351 

(A) Property treated as received in redemption 
Except as otherwise provided in this paragraph, subsection (a) (and not section 351 and not so much of sections 357 and 358 as relates to section 351) shall apply to any property received in a distribution described in subsection (a).
(B) Certain assumptions of liability, etc. 

(i) In general In the case of an acquisition described in section 351, subsection (a) shall not apply to any liability
(I) assumed by the acquiring corporation, or
(II) to which the stock is subject,

if such liability was incurred by the transferor to acquire the stock. For purposes of the preceding sentence, the term stock means stock referred to in paragraph (1)(B) or (2)(A) of subsection (a).

(ii) Extension of obligations, etc. For purposes of clause (i), an extension, renewal, or refinancing of a liability which meets the requirements of clause (i) shall be treated as meeting such requirements.
(iii) Clause (i) does not apply to stock acquired from related person except where complete termination Clause (i) shall apply only to stock acquired by the transferor from a person
(I) none of whose stock is attributable to the transferor under section 318 (a) (other than paragraph (4) thereof), or
(II) who satisfies rules similar to the rules of section 302 (c)(2) with respect to both the acquiring and the issuing corporations (determined as if such person were a distributee of each such corporation).
(C) Distributions incident to formation of bank holding companies 
If
(i) pursuant to a plan, control of a bank is acquired and within 2 years after the date on which such control is acquired, stock constituting control of such bank is transferred to a BHC in connection with its formation,
(ii) incident to the formation of the BHC there is a distribution of property described in subsection (a), and
(iii) the shareholders of the BHC who receive distributions of such property do not have control of such BHC,

then, subsection (a) shall not apply to any securities received by a qualified minority shareholder incident to the formation of such BHC. For purposes of this subparagraph, any assumption of (or acquisition of stock subject to) a liability under subparagraph (B) shall not be treated as a distribution of property.

(D) Definitions and special rule 
For purposes of subparagraph (C) and this subparagraph
(i) Qualified minority shareholder The term qualified minority shareholder means any shareholder who owns less than 10 percent (in value) of the stock of the BHC. For purposes of the preceding sentence, the rules of paragraph (3) of subsection (c) shall apply.
(ii) BHC The term BHC means a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956).
(iii) Special rule in case of BHCs formed before 1985 In the case of a BHC which is formed before 1985, clause (i) of subparagraph (C) shall not apply.
(4) Treatment of certain intragroup transactions 

(A) In general 
In the case of any transfer described in subsection (a) of stock from 1 member of an affiliated group to another member of such group, proper adjustments shall be made to
(i) the adjusted basis of any intragroup stock, and
(ii) the earnings and profits of any member of such group,

to the extent necessary to carry out the purposes of this section.

(B) Definitions 
For purposes of this paragraph
(i) Affiliated group The term affiliated group has the meaning given such term by section 1504 (a).
(ii) Intragroup stock The term intragroup stock means any stock which
(I) is in a corporation which is a member of an affiliated group, and
(II) is held by another member of such group.
(5) Acquisitions by foreign corporations 

(A) In general 
In the case of any acquisition to which subsection (a) applies in which the acquiring corporation is a foreign corporation, the only earnings and profits taken into account under paragraph (2)(A) shall be those earnings and profits
(i) which are attributable (under regulations prescribed by the Secretary) to stock of the acquiring corporation owned (within the meaning of section 958 (a)) by a corporation or individual which is
(I) a United States shareholder (within the meaning of section 951(b)) of the acquiring corporation, and
(II) the transferor or a person who bears a relationship to the transferor described in section 267 (b) or 707 (b), and
(ii) which were accumulated during the period or periods such stock was owned by such person while the acquiring corporation was a controlled foreign corporation.
(B) Regulations 
The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of this paragraph.
(6) Avoidance of multiple inclusions, etc. 
In the case of any acquisition to which subsection (a) applies in which the acquiring corporation or the issuing corporation is a foreign corporation, the Secretary shall prescribe such regulations as are appropriate in order to eliminate a multiple inclusion of any item in income by reason of this subpart and to provide appropriate basis adjustments (including modifications to the application of sections 959 and 961).
(c) Control 

(1) In general 
For purposes of this section, control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote, or at least 50 percent of the total value of shares of all classes of stock. If a person (or persons) is in control (within the meaning of the preceding sentence) of a corporation which in turn owns at least 50 percent of the total combined voting power of all stock entitled to vote of another corporation, or owns at least 50 percent of the total value of the shares of all classes of stock of another corporation, then such person (or persons) shall be treated as in control of such other corporation.
(2) Stock acquired in the transaction 
For purposes of subsection (a)(1)
(A) General rule 
Where 1 or more persons in control of the issuing corporation transfer stock of such corporation in exchange for stock of the acquiring corporation, the stock of the acquiring corporation received shall be taken into account in determining whether such person or persons are in control of the acquiring corporation.
(B) Definition of control group 
Where 2 or more persons in control of the issuing corporation transfer stock of such corporation to the acquiring corporation and, after the transfer, the transferors are in control of the acquiring corporation, the person or persons in control of each corporation shall include each of the persons who so transfer stock.
(3) Constructive ownership 

(A) In general 
Section 318 (a) (relating to constructive ownership of stock) shall apply for purposes of determining control under this section.
(B) Modification of 50-percent limitations in section 318 
For purposes of subparagraph (A)
(i) paragraph (2)(C) of section 318 (a) shall be applied by substituting 5 percent for 50 percent, and
(ii) paragraph (3)(C) of section 318 (a) shall be applied
(I) by substituting 5 percent for 50 percent, and
(II) in any case where such paragraph would not apply but for subclause (I), by considering a corporation as owning the stock (other than stock in such corporation) owned by or for any shareholder of such corporation in that proportion which the value of the stock which such shareholder owned in such corporation bears to the value of all stock in such corporation.

26 USC 305 - Distributions of stock and stock rights

(a) General rule 
Except as otherwise provided in this section, gross income does not include the amount of any distribution of the stock of a corporation made by such corporation to its shareholders with respect to its stock.
(b) Exceptions 
Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies
(1) Distributions in lieu of money 
If the distribution is, at the election of any of the shareholders (whether exercised before or after the declaration thereof), payable either
(A) in its stock, or
(B) in property.
(2) Disproportionate distributions 
If the distribution (or a series of distributions of which such distribution is one) has the result of
(A) the receipt of property by some shareholders, and
(B) an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation.
(3) Distributions of common and preferred stock 
If the distribution (or a series of distributions of which such distribution is one) has the result of
(A) the receipt of preferred stock by some common shareholders, and
(B) the receipt of common stock by other common shareholders.
(4) Distributions on preferred stock 
If the distribution is with respect to preferred stock, other than an increase in the conversion ratio of convertible preferred stock made solely to take account of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible.
(5) Distributions of convertible preferred stock 
If the distribution is of convertible preferred stock, unless it is established to the satisfaction of the Secretary that such distribution will not have the result described in paragraph (2).
(c) Certain transactions treated as distributions 
For purposes of this section and section 301, the Secretary shall prescribe regulations under which a change in conversion ratio, a change in redemption price, a difference between redemption price and issue price, a redemption which is treated as a distribution to which section 301 applies, or any transaction (including a recapitalization) having a similar effect on the interest of any shareholder shall be treated as a distribution with respect to any shareholder whose proportionate interest in the earnings and profits or assets of the corporation is increased by such change, difference, redemption, or similar transaction. Regulations prescribed under the preceding sentence shall provide that
(1) where the issuer of stock is required to redeem the stock at a specified time or the holder of stock has the option to require the issuer to redeem the stock, a redemption premium resulting from such requirement or option shall be treated as reasonable only if the amount of such premium does not exceed the amount determined under the principles of section 1273 (a)(3),
(2) a redemption premium shall not fail to be treated as a distribution (or series of distributions) merely because the stock is callable, and
(3) in any case in which a redemption premium is treated as a distribution (or series of distributions), such premium shall be taken into account under principles similar to the principles of section 1272 (a).
(d) Definitions 

(1) Rights to acquire stock 
For purposes of this section, the term stock includes rights to acquire such stock.
(2) Shareholders 
For purposes of subsections (b) and (c), the term shareholder includes a holder of rights or of convertible securities.
(e) Treatment of purchaser of stripped preferred stock 

(1) In general 
If any person purchases after April 30, 1993, any stripped preferred stock, then such person, while holding such stock, shall include in gross income amounts equal to the amounts which would have been so includible if such stripped preferred stock were a bond issued on the purchase date and having original issue discount equal to the excess, if any, of
(A) the redemption price for such stock, over
(B) the price at which such person purchased such stock.

The preceding sentence shall also apply in the case of any person whose basis in such stock is determined by reference to the basis in the hands of such purchaser.

(2) Basis adjustments 
Appropriate adjustments to basis shall be made for amounts includible in gross income under paragraph (1).
(3) Tax treatment of person stripping stock 
If any person strips the rights to 1 or more dividends from any stock described in paragraph (5)(B) and after April 30, 1993, disposes of such dividend rights, for purposes of paragraph (1), such person shall be treated as having purchased the stripped preferred stock on the date of such disposition for a purchase price equal to such persons adjusted basis in such stripped preferred stock.
(4) Amounts treated as ordinary income 
Any amount included in gross income under paragraph (1) shall be treated as ordinary income.
(5) Stripped preferred stock 
For purposes of this subsection
(A) In general 
The term stripped preferred stock means any stock described in subparagraph (B) if there has been a separation in ownership between such stock and any dividend on such stock which has not become payable.
(B) Description of stock 
Stock is described in this subsection if such stock
(i) is limited and preferred as to dividends and does not participate in corporate growth to any significant extent, and
(ii) has a fixed redemption price.
(6) Purchase 
For purposes of this subsection, the term purchase means
(A) any acquisition of stock, where
(B) the basis of such stock is not determined in whole or in part by the reference to the adjusted basis of such stock in the hands of the person from whom acquired.
(7) Cross reference 
For treatment of stripped interests in certain accounts or entities holding preferred stock, see section 1286 (f).
(f) Cross references 
For special rules
(1) Relating to the receipt of stock and stock rights in corporate organizations and reorganizations, see part III (sec. 351 and following).
(2) In the case of a distribution which results in a gift, see section 2501 and following.
(3) In the case of a distribution which has the effect of the payment of compensation, see section 61 (a)(1).

26 USC 306 - Dispositions of certain stock

(a) General rule 
If a shareholder sells or otherwise disposes of section 306 stock (as defined in subsection (c))
(1) Dispositions other than redemptions 
If such disposition is not a redemption (within the meaning of section 317 (b))
(A) The amount realized shall be treated as ordinary income. This subparagraph shall not apply to the extent that
(i) the amount realized, exceeds
(ii) such stocks ratable share of the amount which would have been a dividend at the time of distribution if (in lieu of section 306 stock) the corporation had distributed money in an amount equal to the fair market value of the stock at the time of distribution.
(B) Any excess of the amount realized over the sum of
(i) the amount treated under subparagraph (A) as ordinary income, plus
(ii) the adjusted basis of the stock,

shall be treated as gain from the sale of such stock.

(C) No loss shall be recognized.
(D) Treatment as dividend.— 
For purposes of section 1 (h)(11) and such other provisions as the Secretary may specify, any amount treated as ordinary income under this paragraph shall be treated as a dividend received from the corporation.
(2) Redemption 
If the disposition is a redemption, the amount realized shall be treated as a distribution of property to which section 301 applies.
(b) Exceptions 
Subsection (a) shall not apply
(1) Termination of shareholder’s interest, etc. 

(A) Not in redemption 
If the disposition
(i) is not a redemption;
(ii) is not, directly or indirectly, to a person the ownership of whose stock would (under section 318 (a)) be attributable to the shareholder; and
(iii) terminates the entire stock interest of the shareholder in the corporation (and for purposes of this clause, section 318 (a) shall apply).
(B) In redemption 
If the disposition is a redemption and paragraph (3) or (4) of section 302 (b) applies.
(2) Liquidations 
If the section 306 stock is redeemed in a distribution in complete liquidation to which part II (sec. 331 and following) applies.
(3) Where gain or loss is not recognized 
To the extent that, under any provision of this subtitle, gain or loss to the shareholder is not recognized with respect to the disposition of the section 306 stock.
(4) Transactions not in avoidance 
If it is established to the satisfaction of the Secretary
(A) that the distribution, and the disposition or redemption, or
(B) in the case of a prior or simultaneous disposition (or redemption) of the stock with respect to which the section 306 stock disposed of (or redeemed) was issued, that the disposition (or redemption) of the section 306 stock,

was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax.

(c) Section 306 stock defined 

(1) In general 
For purposes of this subchapter, the term section 306 stock means stock which meets the requirements of subparagraph (A), (B), or (C) of this paragraph.
(A) Distributed to seller 
Stock (other than common stock issued with respect to common stock) which was distributed to the shareholder selling or otherwise disposing of such stock if, by reason of section 305 (a), any part of such distribution was not includible in the gross income of the shareholder.
(B) Received in a corporate reorganization or separation 
Stock which is not common stock and
(i) which was received, by the shareholder selling or otherwise disposing of such stock, in pursuance of a plan of reorganization (within the meaning of section 368 (a)), or in a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applied, and
(ii) with respect to the receipt of which gain or loss to the shareholder was to any extent not recognized by reason of part III, but only to the extent that either the effect of the transaction was substantially the same as the receipt of a stock dividend, or the stock was received in exchange for section 306 stock.

For purposes of this section, a receipt of stock to which the foregoing provisions of this subparagraph apply shall be treated as a distribution of stock.

(C) Stock having transferred or substituted basis 
Except as otherwise provided in subparagraph (B), stock the basis of which (in the hands of the shareholder selling or otherwise disposing of such stock) is determined by reference to the basis (in the hands of such shareholder or any other person) of section 306 stock.
(2) Exception where no earnings and profits 
For purposes of this section, the term section 306 stock does not include any stock no part of the distribution of which would have been a dividend at the time of the distribution if money had been distributed in lieu of the stock.
(3) Certain stock acquired in section 351 exchange 
The term section 306 stock also includes any stock which is not common stock acquired in an exchange to which section 351 applied if receipt of money (in lieu of the stock) would have been treated as a dividend to any extent. Rules similar to the rules of section 304 (b)(2) shall apply
(A) for purposes of the preceding sentence, and
(B) for purposes of determining the application of this section to any subsequent disposition of stock which is section 306 stock by reason of an exchange described in the preceding sentence.
(4) Application of attribution rules for certain purposes 
For purposes of paragraphs (1)(B)(ii) and (3), section 318 (a) shall apply. For purposes of applying the preceding sentence to paragraph (3), the rules of section 304 (c)(3)(B) shall apply.
(d) Stock rights 
For purposes of this section
(1) stock rights shall be treated as stock, and
(2) stock acquired through the exercise of stock rights shall be treated as stock distributed at the time of the distribution of the stock rights, to the extent of the fair market value of such rights at the time of the distribution.
(e) Convertible stock 
For purposes of subsection (c)
(1) if section 306 stock was issued with respect to common stock and later such section 306 stock is exchanged for common stock in the same corporation (whether or not such exchange is pursuant to a conversion privilege contained in the section 306 stock), then (except as provided in paragraph (2)) the common stock so received shall not be treated as section 306 stock; and
(2) common stock with respect to which there is a privilege of converting into stock other than common stock (or into property), whether or not the conversion privilege is contained in such stock, shall not be treated as common stock.
(f) Source of gain 
The amount treated under subsection (a)(1)(A) as ordinary income shall, for purposes of part I of subchapter N (sec. 861 and following, relating to determination of sources of income), be treated as derived from the same source as would have been the source if money had been received from the corporation as a dividend at the time of the distribution of such stock. If under the preceding sentence such amount is determined to be derived from sources within the United States, such amount shall be considered to be fixed or determinable annual or periodical gains, profits, and income within the meaning of section 871 (a) or section 881 (a), as the case may be.
(g) Change in terms and conditions of stock 
If a substantial change is made in the terms and conditions of any stock, then, for purposes of this section
(1) the fair market value of such stock shall be the fair market value at the time of the distribution or at the time of such change, whichever such value is higher;
(2) such stocks ratable share of the amount which would have been a dividend if money had been distributed in lieu of stock shall be determined as of the time of distribution or as of the time of such change, whichever such ratable share is higher; and
(3) subsection (c)(2) shall not apply unless the stock meets the requirements of such subsection both at the time of such distribution and at the time of such change.

26 USC 307 - Basis of stock and stock rights acquired in distributions

(a) General rule 
If a shareholder in a corporation receives its stock or rights to acquire its stock (referred to in this subsection as new stock) in a distribution to which section 305 (a) applies, then the basis of such new stock and of the stock with respect to which it is distributed (referred to in this section as old stock), respectively, shall, in the shareholders hands, be determined by allocating between the old stock and the new stock the adjusted basis of the old stock. Such allocation shall be made under regulations prescribed by the Secretary.
(b) Exception for certain stock rights 

(1) In general 
If
(A) a corporation distributes rights to acquire its stock to a shareholder in a distribution to which section 305 (a) applies, and
(B) the fair market value of such rights at the time of the distribution is less than 15 percent of the fair market value of the old stock at such time,

then subsection (a) shall not apply and the basis of such rights shall be zero, unless the taxpayer elects under paragraph (2) of this subsection to determine the basis of the old stock and of the stock rights under the method of allocation provided in subsection (a).

(2) Election 
The election referred to in paragraph (1) shall be made in the return filed within the time prescribed by law (including extensions thereof) for the taxable year in which such rights were received. Such election shall be made in such manner as the Secretary may by regulations prescribe, and shall be irrevocable when made.
(c) Cross reference 
For basis of stock and stock rights distributed before June 22, 1954, see section 1052.

Subpart B - Effects on Corporation

26 USC 311 - Taxability of corporation on distribution

(a) General rule 
Except as provided in subsection (b), no gain or loss shall be recognized to a corporation on the distribution (not in complete liquidation) with respect to its stock of
(1) its stock (or rights to acquire its stock), or
(2) property.
(b) Distributions of appreciated property 

(1) In general 
If
(A) a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and
(B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation),

then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value.

(2) Treatment of liabilities 
Rules similar to the rules of section 336 (b) shall apply for purposes of this subsection.
(3) Special rule for certain distributions of partnership or trust interests 
If the property distributed consists of an interest in a partnership or trust, the Secretary may by regulations provide that the amount of the gain recognized under paragraph (1) shall be computed without regard to any loss attributable to property contributed to the partnership or trust for the principal purpose of recognizing such loss on the distribution.

26 USC 312 - Effect on earnings and profits

(a) General rule 
Except as otherwise provided in this section, on the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation (to the extent thereof) shall be decreased by the sum of
(1) the amount of money,
(2) the principal amount of the obligations of such corporation (or, in the case of obligations having original issue discount, the aggregate issue price of such obligations), and
(3) the adjusted basis of the other property, so distributed.
(b) Distributions of appreciated property 
On the distribution by a corporation, with respect to its stock, of any property (other than an obligation of such corporation) the fair market value of which exceeds the adjusted basis thereof
(1) the earnings and profits of the corporation shall be increased by the amount of such excess, and
(2) subsection (a)(3) shall be applied by substituting fair market value for adjusted basis.

For purposes of this subsection and subsection (a), the adjusted basis of any property is its adjusted basis as determined for purposes of computing earnings and profits.

(c) Adjustments for liabilities 
In making the adjustments to the earnings and profits of a corporation under subsection (a) or (b), proper adjustment shall be made for
(1) the amount of any liability to which the property distributed is subject, and
(2) the amount of any liability of the corporation assumed by a shareholder in connection with the distribution.
(d) Certain distributions of stock and securities 

(1) In general 
The distribution to a distributee by or on behalf of a corporation of its stock or securities, of stock or securities in another corporation, or of property, in a distribution to which this title applies, shall not be considered a distribution of the earnings and profits of any corporation
(A) if no gain to such distributee from the receipt of such stock or securities, or property, was recognized under this title, or
(B) if the distribution was not subject to tax in the hands of such distributee by reason of section 305 (a).
(2) Prior distributions 
In the case of a distribution of stock or securities, or property, to which section 115(h) of the Internal Revenue Code of 1939 (or the corresponding provision of prior law) applied, the effect on earnings and profits of such distribution shall be determined under such section 115 (h), or the corresponding provision of prior law, as the case may be.
(3) Stock or securities 
For purposes of this subsection, the term stock or securities includes rights to acquire stock or securities.
[(e) Repealed. Pub. L. 98–369, div. A, title I, § 61(a)(2)(B), July 18, 1984, 98 Stat. 581] 
(f) Effect on earnings and profits of gain or loss and of receipt of tax-free distributions 

(1) Effect on earnings and profits of gain or loss 
The gain or loss realized from the sale or other disposition (after February 28, 1913) of property by a corporation
(A) for the purpose of the computation of the earnings and profits of the corporation, shall (except as provided in subparagraph (B)) be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain, except that no regard shall be had to the value of the property as of March 1, 1913; but
(B) for purposes of the computation of the earnings and profits of the corporation for any period beginning after February 28, 1913, shall be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain.

Gain or loss so realized shall increase or decrease the earnings and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing taxable income under the law applicable to the year in which such sale or disposition was made. Where, in determining the adjusted basis used in computing such realized gain or loss, the adjustment to the basis differs from the adjustment proper for the purpose of determining earnings and profits, then the latter adjustment shall be used in determining the increase or decrease above provided. For purposes of this subsection, a loss with respect to which a deduction is disallowed under section 1091 (relating to wash sales of stock or securities), or the corresponding provision of prior law, shall not be deemed to be recognized.

(2) Effect on earnings and profits of receipt of tax-free distributions 
Where a corporation receives (after February 28, 1913) a distribution from a second corporation which (under the law applicable to the year in which the distribution was made) was not a taxable dividend to the shareholders of the second corporation, the amount of such distribution shall not increase the earnings and profits of the first corporation in the following cases:
(A) no such increase shall be made in respect of the part of such distribution which (under such law) is directly applied in reduction of the basis of the stock in respect of which the distribution was made; and
(B) no such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated between such stock and the property received (or such basis would, but for section 307 (b), be so allocated).
(g) Earnings and profits—increase in value accrued before March 1, 1913 

(1) If any increase or decrease in the earnings and profits for any period beginning after February 28, 1913, with respect to any matter would be different had the adjusted basis of the property involved been determined without regard to its March 1, 1913, value, then, except as provided in paragraph (2), an increase (properly reflecting such difference) shall be made in that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913.
(2) If the application of subsection (f) to a sale or other disposition after February 28, 1913, results in a loss which is to be applied in decrease of earnings and profits for any period beginning after February 28, 1913, then, notwithstanding subsection (f) and in lieu of the rule provided in paragraph (1) of this subsection, the amount of such loss so to be applied shall be reduced by the amount, if any, by which the adjusted basis of the property used in determining the loss exceeds the adjusted basis computed without regard to the value of the property on March 1, 1913, and if such amount so applied in reduction of the decrease exceeds such loss, the excess over such loss shall increase that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913.
(h) Allocation in certain corporate separations and reorganizations 

(1) Section 355 
In the case of a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applies, proper allocation with respect to the earnings and profits of the distributing corporation and the controlled corporation (or corporations) shall be made under regulations prescribed by the Secretary.
(2) Section 368 (a)(1)(C) or (D) 
In the case of a reorganization described in subparagraph (C) or (D) of section 368 (a)(1), proper allocation with respect to the earnings and profits of the acquired corporation shall, under regulations prescribed by the Secretary, be made between the acquiring corporation and the acquired corporation (or any corporation which had control of the acquired corporation before the reorganization).
(i) Distribution of proceeds of loan insured by the United States 
If a corporation distributes property with respect to its stock and if, at the time of distribution
(1) there is outstanding a loan to such corporation which was made, guaranteed, or insured by the United States (or by any agency or instrumentality thereof), and
(2) the amount of such loan so outstanding exceeds the adjusted basis of the property constituting security for such loan, then the earnings and profits of the corporation shall be increased by the amount of such excess, and (immediately after the distribution) shall be decreased by the amount of such excess. For purposes of paragraph (2), the adjusted basis of the property at the time of distribution shall be determined without regard to any adjustment under section 1016 (a)(2) (relating to adjustment for depreciation, etc.). For purposes of this subsection, a commitment to make, guarantee, or insure a loan shall be treated as the making, guaranteeing, or insuring of a loan.
[(j) Repealed. Pub. L. 108–357, title IV, § 413(c)(4), Oct. 22, 2004, 118 Stat. 1507] 
(k) Effect of depreciation on earnings and profits 

(1) General rule 
For purposes of computing the earnings and profits of a corporation for any taxable year beginning after June 30, 1972, the allowance for depreciation (and amortization, if any) shall be deemed to be the amount which would be allowable for such year if the straight line method of depreciation had been used for each taxable year beginning after June 30, 1972.
(2) Exception 
If for any taxable year a method of depreciation was used by the taxpayer which the Secretary has determined results in a reasonable allowance under section 167 (a) and which is the unit-of-production method or other method not expressed in a term of years, then the adjustment to earnings and profits for depreciation for such year shall be determined under the method so used (in lieu of the straight line method).
(3) Exception for tangible property 

(A) In general 
Except as provided in subparagraph (B), in the case of tangible property to which section 168 applies, the adjustment to earnings and profits for depreciation for any taxable year shall be determined under the alternative depreciation system (within the meaning of section 168 (g)(2)).
(B) Treatment of amounts deductible under section 179, 179A, 179B, 179C, 179D, or 179E 
For purposes of computing the earnings and profits of a corporation, any amount deductible under section 179, 179A, 179B, 179C, 179D, or 179E shall be allowed as a deduction ratably over the period of 5 taxable years (beginning with the taxable year for which such amount is deductible under section 179, 179A, 179B, 179C, 179D, or 179E, as the case may be).
(4) Certain foreign corporations 
The provisions of paragraph (1) shall not apply in computing the earnings and profits of a foreign corporation for any taxable year for which less than 20 percent of the gross income from all sources of such corporation is derived from sources within the United States.
(5) Basis adjustment not taken into account 
In computing the earnings and profits of a corporation for any taxable year, the allowance for depreciation (and amortization, if any) shall be computed without regard to any basis adjustment under section 50 (c).
(l) Discharge of indebtedness income 

(1) Does not increase earnings and profits if applied to reduce basis 
The earnings and profits of a corporation shall not include income from the discharge of indebtedness to the extent of the amount applied to reduce basis under section 1017.
(2) Reduction of deficit in earnings and profits in certain cases 
If
(A) the interest of any shareholder of a corporation is terminated or extinguished in a title 11 or similar case (within the meaning of section 368 (a)(3)(A)), and
(B) there is a deficit in the earnings and profits of the corporation,

then such deficit shall be reduced by an amount equal to the paid-in capital which is allocable to the interest of the shareholder which is so terminated or extinguished.

(m) No adjustment for interest paid on certain registration-required obligations not in registered form 
The earnings and profits of any corporation shall not be decreased by any interest with respect to which a deduction is not or would not be allowable by reason of section 163 (f), unless at the time of issuance the issuer is a foreign corporation that is not a controlled foreign corporation (within the meaning of section 957) and the issuance did not have as a purpose the avoidance of section 163(f) of this subsection[1]
(n) Adjustments to earnings and profits to more accurately reflect economic gain and loss 
For purposes of computing the earnings and profits of a corporation, the following adjustments shall be made:
(1) Construction period carrying charges 

(A) In general 
In the case of any amount paid or incurred for construction period carrying charges
(i) no deduction shall be allowed with respect to such amount, and
(ii) the basis of the property with respect to which such charges are allocable shall be increased by such amount.
(B) Construction period carrying charges defined 
For purposes of this paragraph, the term construction period carrying charges means all
(i) interest paid or accrued on indebtedness incurred or continued to acquire, construct, or carry property,
(ii) property taxes, and
(iii) similar carrying charges,

to the extent such interest, taxes, or charges are attributable to the construction period for such property and would be allowable as a deduction in determining taxable income under this chapter for the taxable year in which paid or incurred.

(C) Construction period 
The term construction period has the meaning given the term production period under section 263A (f)(4)(B).
(2) Intangible drilling costs and mineral exploration and development costs 

(A) Intangible drilling costs 
Any amount allowable as a deduction under section 263 (c) in determining taxable income (other than costs incurred in connection with a nonproductive well)
(i) shall be capitalized, and
(ii) shall be allowed as a deduction ratably over the 60-month period beginning with the month in which such amount was paid or incurred.
(B) Mineral exploration and development costs 
Any amount allowable as a deduction under section 616 (a) or 617 in determining taxable income
(i) shall be capitalized, and
(ii) shall be allowed as a deduction ratably over the 120-month period beginning with the later of
(I) the month in which production from the deposit begins, or
(II) the month in which such amount was paid or incurred.
(3) Certain amortization provisions not to apply 
Sections 173 and 248 shall not apply.
(4) LIFO inventory adjustments 

(A) In general 
Earnings and profits shall be increased or decreased by the amount of any increase or decrease in the LIFO recapture amount as of the close of each taxable year; except that any decrease below the LIFO recapture amount as of the close of the taxable year preceding the 1st taxable year to which this paragraph applies to the taxpayer shall be taken into account only to the extent provided in regulations prescribed by the Secretary.
(B) LIFO recapture amount 
For purposes of this paragraph, the term LIFO recapture amount means the amount (if any) by which
(i) the inventory amount of the inventory assets under the first-in, first-out method authorized by section 471, exceeds
(ii) the inventory amount of such assets under the LIFO method.
(C) Definitions 
For purposes of this paragraph
(i) LIFO method The term LIFO method means the method authorized by section 472 (relating to last-in, first-out inventories).
(ii) Inventory assets The term inventory assets means stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year.
(iii) Inventory amount The inventory amount of assets under the first-in, first-out method authorized by section 471 shall be determined
(I) if the corporation uses the retail method of valuing inventories under section 472, by using such method, or
(II) if subclause (I) does not apply, by using cost or market, whichever is lower.
(5) Installment sales 
In the case of any installment sale, earnings and profits shall be computed as if the corporation did not use the installment method.
(6) Completed contract method of accounting 
In the case of a taxpayer who uses the completed contract method of accounting, earnings and profits shall be computed as if such taxpayer used the percentage of completion method of accounting.
(7) Redemptions 
If a corporation distributes amounts in a redemption to which section 302 (a) or 303 applies, the part of such distribution which is properly chargeable to earnings and profits shall be an amount which is not in excess of the ratable share of the earnings and profits of such corporation accumulated after February 28, 1913, attributable to the stock so redeemed.
(8) Special rule for certain foreign corporations 
In the case of a foreign corporation described in subsection (k)(4)
(A) paragraphs (4) and (6) shall apply only in the case of taxable years beginning after December 31, 1985, and
(B) paragraph (5) shall apply only in the case of taxable years beginning after December 31, 1987.
(o) Definition of original issue discount and issue price for purposes of subsection (a)(2) 
For purposes of subsection (a)(2), the terms original issue discount and issue price have the same respective meanings as when used in subpart A of part V of subchapter P of this chapter.
[1] Subsec. (m) was enacted without a period at the end.

Subpart C - Definitions; Constructive Ownership of Stock

26 USC 316 - Dividend defined

(a) General rule 
For purposes of this subtitle, the term dividend means any distribution of property made by a corporation to its shareholders
(1) out of its earnings and profits accumulated after February 28, 1913, or
(2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.

Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection.

(b) Special rules 

(1) Certain insurance company dividends 
The definition in subsection (a) shall not apply to the term dividend as used in subchapter L in any case where the reference is to dividends of insurance companies paid to policyholders as such.
(2) Distributions by personal holding companies 

(A) In the case of a corporation which
(i) under the law applicable to the taxable year in which the distribution is made, is a personal holding company (as defined in section 542), or
(ii) for the taxable year in respect of which the distribution is made under section 563 (b) (relating to dividends paid after the close of the taxable year), or section 547 (relating to deficiency dividends), or the corresponding provisions of prior law, is a personal holding company under the law applicable to such taxable year,

the term dividend also means any distribution of property (whether or not a dividend as defined in subsection (a)) made by the corporation to its shareholders, to the extent of its undistributed personal holding company income (determined under section 545 without regard to distributions under this paragraph) for such year.

(B) For purposes of subparagraph (A), the term distribution of property includes a distribution in complete liquidation occurring within 24 months after the adoption of a plan of liquidation, but
(i) only to the extent of the amounts distributed to distributees other than corporate shareholders, and
(ii) only to the extent that the corporation designates such amounts as a dividend distribution and duly notifies such distributees of such designation, under regulations prescribed by the Secretary, but
(iii) not in excess of the sum of such distributees allocable share of the undistributed personal holding company income for such year, computed without regard to this subparagraph or section 562 (b).
(3) Deficiency dividend distributions by a regulated investment company or real estate investment trust 
The term dividend also means any distribution of property (whether or not a dividend as defined in subsection (a)) which constitutes a deficiency dividend as defined in section 860 (f).

26 USC 317 - Other definitions

(a) Property 
For purposes of this part, the term property means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock).
(b) Redemption of stock 
For purposes of this part, stock shall be treated as redeemed by a corporation if the corporation acquires its stock from a shareholder in exchange for property, whether or not the stock so acquired is cancelled, retired, or held as treasury stock.

26 USC 318 - Constructive ownership of stock

(a) General rule 
For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable
(1) Members of family 

(A) In general 
An individual shall be considered as owning the stock owned, directly or indirectly, by or for
(i) his spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and
(ii) his children, grandchildren, and parents.
(B) Effect of adoption 
For purposes of subparagraph (A)(ii), a legally adopted child of an individual shall be treated as a child of such individual by blood.
(2) Attribution from partnerships, estates, trusts, and corporations 

(A) From partnerships and estates 
Stock owned, directly or indirectly, by or for a partnership or estate shall be considered as owned proportionately by its partners or beneficiaries.
(B) From trusts 

(i) Stock owned, directly or indirectly, by or for a trust (other than an employees trust described in section 401 (a) which is exempt from tax under section 501 (a)) shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries in such trust.
(ii) Stock owned, directly or indirectly, by or for any portion of a trust of which a person is considered the owner under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners) shall be considered as owned by such person.
(C) From corporations 
If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation.
(3) Attribution to partnerships, estates, trusts, and corporations 

(A) To partnerships and estates 
Stock owned, directly or indirectly, by or for a partner or a beneficiary of an estate shall be considered as owned by the partnership or estate.
(B) To trusts 

(i) Stock owned, directly or indirectly, by or for a beneficiary of a trust (other than an employees trust described in section 401 (a) which is exempt from tax under section 501 (a)) shall be considered as owned by the trust, unless such beneficiarys interest in the trust is a remote contingent interest. For purposes of this clause, a contingent interest of a beneficiary in a trust shall be considered remote if, under the maximum exercise of discretion by the trustee in favor of such beneficiary, the value of such interest, computed actuarially, is 5 percent or less of the value of the trust property.
(ii) Stock owned, directly or indirectly, by or for a person who is considered the owner of any portion of a trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners), shall be considered as owned by the trust.
(C) To corporations 
If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such corporation shall be considered as owning the stock owned, directly or indirectly, by or for such person.
(4) Options 
If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.
(5) Operating rules 

(A) In general 
Except as provided in subparagraphs (B) and (C), stock constructively owned by a person by reason of the application of paragraph (1), (2), (3), or (4), shall, for purposes of applying paragraphs (1), (2), (3), and (4), be considered as actually owned by such person.
(B) Members of family 
Stock constructively owned by an individual by reason of the application of paragraph (1) shall not be considered as owned by him for purposes of again applying paragraph (1) in order to make another the constructive owner of such stock.
(C) Partnerships, estates, trusts, and corporations 
Stock constructively owned by a partnership, estate, trust, or corporation by reason of the application of paragraph (3) shall not be considered as owned by it for purposes of applying paragraph (2) in order to make another the constructive owner of such stock.
(D) Option rule in lieu of family rule 
For purposes of this paragraph, if stock may be considered as owned by an individual under paragraph (1) or (4), it shall be considered as owned by him under paragraph (4).
(E) S corporation treated as partnership 
For purposes of this subsection
(i) an S corporation shall be treated as a partnership, and
(ii) any shareholder of the S corporation shall be treated as a partner of such partnership.

The preceding sentence shall not apply for purposes of determining whether stock in the S corporation is constructively owned by any person.

(b) Cross references 
For provisions to which the rules contained in subsection (a) apply, see
(1) section 302 (relating to redemption of stock);
(2) section 304 (relating to redemption by related corporations);
(3) section 306 (b)(1)(A) (relating to disposition of section 306 stock);
(4) section 338 (h)(3) (defining purchase);
(5) section 382(l)(3) (relating to special limitations on net operating loss carryovers);
(6) section 856 (d) (relating to definition of rents from real property in the case of real estate investment trusts);
(7) section 958 (b) (relating to constructive ownership rules with respect to controlled foreign corporations); and
(8) section 6038 (e)(2) (relating to information with respect to certain foreign corporations).

TITLE 26 - US CODE - PART II - CORPORATE LIQUIDATIONS

Subpart A - Effects on Recipients

26 USC 331 - Gain or loss to shareholders in corporate liquidations

(a) Distributions in complete liquidation treated as exchanges 
Amounts received by a shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.
(b) Nonapplication of section 301 
Section 301 (relating to effects on shareholder of distributions of property) shall not apply to any distribution of property (other than a distribution referred to in paragraph (2)(B) of section 316 (b)) in complete liquidation.
(c) Cross reference 
For general rule for determination of the amount of gain or loss recognized, see section 1001.

26 USC 332 - Complete liquidations of subsidiaries

(a) General rule 
No gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation.
(b) Liquidations to which section applies 
For purposes of this section, a distribution shall be considered to be in complete liquidation only if
(1) the corporation receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock (in such other corporation) meeting the requirements of section 1504 (a)(2); and either
(2) the distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corporation in complete cancellation or redemption of all its stock shall be considered an adoption of a plan of liquidation, even though no time for the completion of the transfer of the property is specified in such resolution; or
(3) such distribution is one of a series of distributions by such other corporation in complete cancellation or redemption of all its stock in accordance with a plan of liquidation under which the transfer of all the property under the liquidation is to be completed within 3 years from the close of the taxable year during which is made the first of the series of distributions under the plan, except that if such transfer is not completed within such period, or if the taxpayer does not continue qualified under paragraph (1) until the completion of such transfer, no distribution under the plan shall be considered a distribution in complete liquidation.

If such transfer of all the property does not occur within the taxable year, the Secretary may require of the taxpayer such bond, or waiver of the statute of limitations on assessment and collection, or both, as he may deem necessary to insure, if the transfer of the property is not completed within such 3-year period, or if the taxpayer does not continue qualified under paragraph (1) until the completion of such transfer, the assessment and collection of all income taxes then imposed by law for such taxable year or subsequent taxable years, to the extent attributable to property so received. A distribution otherwise constituting a distribution in complete liquidation within the meaning of this subsection shall not be considered as not constituting such a distribution merely because it does not constitute a distribution or liquidation within the meaning of the corporate law under which the distribution is made; and for purposes of this subsection a transfer of property of such other corporation to the taxpayer shall not be considered as not constituting a distribution (or one of a series of distributions) in complete cancellation or redemption of all the stock of such other corporation, merely because the carrying out of the plan involves (A) the transfer under the plan to the taxpayer by such other corporation of property, not attributable to shares owned by the taxpayer, on an exchange described in section 361, and (B) the complete cancellation or redemption under the plan, as a result of exchanges described in section 354, of the shares not owned by the taxpayer.

(c) Deductible liquidating distributions of regulated investment companies and real estate investment trusts 
If a corporation receives a distribution from a regulated investment company or a real estate investment trust which is considered under subsection (b) as being in complete liquidation of such company or trust, then, notwithstanding any other provision of this chapter, such corporation shall recognize and treat as a dividend from such company or trust an amount equal to the deduction for dividends paid allowable to such company or trust by reason of such distribution.
(d) Recognition of gain on liquidation of certain holding companies 

(1) In general 
In the case of any distribution to a foreign corporation in complete liquidation of an applicable holding company
(A) subsection (a) and section 331 shall not apply to such distribution, and
(B) such distribution shall be treated as a distribution of property to which section 301 applies.
(2) Applicable holding company 
For purposes of this subsection:
(A) In general 
The term applicable holding company means any domestic corporation
(i) which is a common parent of an affiliated group,
(ii) stock of which is directly owned by the distributee foreign corporation,
(iii) substantially all of the assets of which consist of stock in other members of such affiliated group, and
(iv) which has not been in existence at all times during the 5 years immediately preceding the date of the liquidation.
(B) Affiliated group 
For purposes of this subsection, the term affiliated group has the meaning given such term by section 1504 (a) (without regard to paragraphs (2) and (4) of section 1504 (b)).
(3) Coordination with subpart F 
If the distributee of a distribution described in paragraph (1) is a controlled foreign corporation (as defined in section 957), then notwithstanding paragraph (1) or subsection (a), such distribution shall be treated as a distribution to which section 331 applies.
(4) Regulations 
The Secretary shall provide such regulations as appropriate to prevent the abuse of this subsection, including regulations which provide, for the purposes of clause (iv) of paragraph (2)(A), that a corporation is not in existence for any period unless it is engaged in the active conduct of a trade or business or owns a significant ownership interest in another corporation so engaged.

26 USC 333 - Repealed. Pub. L. 99514, title VI, 631(e)(3), Oct. 22, 1986, 100 Stat. 2273]

Section, acts Aug. 16, 1954, ch. 736, 68A Stat. 103; Feb. 26, 1964, Pub. L. 88–272, title II, § 225(g), 78 Stat. 89; Oct. 4, 1976, Pub. L. 94–455, title XIX, §§ 1901(a)(44), 1906 (b)(13)(A), 1951 (b)(6)(A), 90 Stat. 1772, 1834, 1838, related to election as to recognition of gain in certain liquidations.

26 USC 334 - Basis of property received in liquidations

(a) General rule 
If property is received in a distribution in complete liquidation, and if gain or loss is recognized on receipt of such property, then the basis of the property in the hands of the distributee shall be the fair market value of such property at the time of the distribution.
(b) Liquidation of subsidiary 

(1) In general 
If property is received by a corporate distributee in a distribution in a complete liquidation to which section 332 applies (or in a transfer described in section 337 (b)(1)), the basis of such property in the hands of such distributee shall be the same as it would be in the hands of the transferor; except that, in the hands of such distributee
(A) the basis of such property shall be the fair market value of the property at the time of the distribution in any case in which gain or loss is recognized by the liquidating corporation with respect to such property, and
(B) the basis of any property described in section 362 (e)(1)(B) shall be the fair market value of the property at the time of the distribution in any case in which such distributees aggregate adjusted basis of such property would (but for this subparagraph) exceed the fair market value of such property immediately after such liquidation.
(2) Corporate distributee 
For purposes of this subsection, the term corporate distributee means only the corporation which meets the stock ownership requirements specified in section 332 (b).

Subpart B - Effects on Corporation

26 USC 336 - Gain or loss recognized on property distributed in complete liquidation

(a) General rule 
Except as otherwise provided in this section or section 337, gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property were sold to the distributee at its fair market value.
(b) Treatment of liabilities 
If any property distributed in the liquidation is subject to a liability or the shareholder assumes a liability of the liquidating corporation in connection with the distribution, for purposes of subsection (a) and section 337, the fair market value of such property shall be treated as not less than the amount of such liability.
(c) Exception for liquidations which are part of a reorganization 
For provision providing that this subpart does not apply to distributions in pursuance of a plan of reorganization, see section 361 (c)(4).
(d) Limitations on recognition of loss 

(1) No loss recognized in certain distributions to related persons 

(A) In general 
No loss shall be recognized to a liquidating corporation on the distribution of any property to a related person (within the meaning of section 267) if
(i) such distribution is not pro rata, or
(ii) such property is disqualified property.
(B) Disqualified property 
For purposes of subparagraph (A), the term disqualified property means any property which is acquired by the liquidating corporation in a transaction to which section 351 applied, or as a contribution to capital, during the 5-year period ending on the date of the distribution. Such term includes any property if the adjusted basis of such property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence.
(2) Special rule for certain property acquired in certain carryover basis transactions 

(A) In general 
For purposes of determining the amount of loss recognized by any liquidating corporation on any sale, exchange, or distribution of property described in subparagraph (B), the adjusted basis of such property shall be reduced (but not below zero) by the excess (if any) of
(i) the adjusted basis of such property immediately after its acquisition by such corporation, over
(ii) the fair market value of such property as of such time.
(B) Description of property 

(i) In general For purposes of subparagraph (A), property is described in this subparagraph if
(I) such property is acquired by the liquidating corporation in a transaction to which section 351 applied or as a contribution to capital, and
(II) the acquisition of such property by the liquidating corporation was part of a plan a principal purpose of which was to recognize loss by the liquidating corporation with respect to such property in connection with the liquidation.

Other property shall be treated as so described if the adjusted basis of such other property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence.

(ii) Certain acquisitions treated as part of plan For purposes of clause (i), any property described in clause (i)(I) acquired by the liquidated corporation after the date 2 years before the date of the adoption of the plan of complete liquidation shall, except as provided in regulations, be treated as acquired as part of a plan described in clause (i)(II).
(C) Recapture in lieu of disallowance 
The Secretary may prescribe regulations under which, in lieu of disallowing a loss under subparagraph (A) for a prior taxable year, the gross income of the liquidating corporation for the taxable year in which the plan of complete liquidation is adopted shall be increased by the amount of the disallowed loss.
(3) Special rule in case of liquidation to which section 332 applies 
In the case of any liquidation to which section 332 applies, no loss shall be recognized to the liquidating corporation on any distribution in such liquidation. The preceding sentence shall apply to any distribution to the 80-percent distributee only if subsection (a) or (b)(1) of section 337 applies to such distribution.
(e) Certain stock sales and distributions may be treated as asset transfers 
Under regulations prescribed by the Secretary, if
(1) a corporation owns stock in another corporation meeting the requirements of section 1504 (a)(2), and
(2) such corporation sells, exchanges, or distributes all of such stock,

an election may be made to treat such sale, exchange, or distribution as a disposition of all of the assets of such other corporation, and no gain or loss shall be recognized on the sale, exchange, or distribution of such stock.

26 USC 337 - Nonrecognition for property distributed to parent in complete liquidation of subsidiary

(a) In general 
No gain or loss shall be recognized to the liquidating corporation on the distribution to the 80-percent distributee of any property in a complete liquidation to which section 332 applies.
(b) Treatment of indebtedness of subsidiary, etc. 

(1) Indebtedness of subsidiary to parent 
If
(A) a corporation is liquidated in a liquidation to which section 332 applies, and
(B) on the date of the adoption of the plan of liquidation, such corporation was indebted to the 80-percent distributee,

for purposes of this section and section 336, any transfer of property to the 80-percent distributee in satisfaction of such indebtedness shall be treated as a distribution to such distributee in such liquidation.

(2) Treatment of tax-exempt distributee 

(A) In general 
Except as provided in subparagraph (B), paragraph (1) and subsection (a) shall not apply where the 80-percent distributee is an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.
(B) Exception where property will be used in unrelated business 

(i) In general Subparagraph (A) shall not apply to any distribution of property to an organization described in section 511 (a)(2) if, immediately after such distribution, such organization uses such property in an activity the income from which is subject to tax under section 511 (a).
(ii) Later disposition or change in use If any property to which clause (i) applied is disposed of by the organization acquiring such property, notwithstanding any other provision of law, any gain (not in excess of the amount not recognized by reason of clause (i)) shall be included in such organizations unrelated business taxable income. For purposes of the preceding sentence, if such property ceases to be used in an activity referred to in clause (i), such organization shall be treated as having disposed of such property on the date of such cessation.
(c) 80-percent distributee 
For purposes of this section, the term 80-percent distributee means only the corporation which meets the 80-percent stock ownership requirements specified in section 332 (b). For purposes of this section, the determination of whether any corporation is an 80-percent distributee shall be made without regard to any consolidated return regulation.
(d) Regulations 
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of the amendments made by subtitle D of title VI of the Tax Reform Act of 1986, including
(1) regulations to ensure that such purposes may not be circumvented through the use of any provision of law or regulations (including the consolidated return regulations and part III of this subchapter) or through the use of a regulated investment company, real estate investment trust, or tax-exempt entity, and
(2) regulations providing for appropriate coordination of the provisions of this section with the provisions of this title relating to taxation of foreign corporations and their shareholders.

26 USC 338 - Certain stock purchases treated as asset acquisitions

(a) General rule 
For purposes of this subtitle, if a purchasing corporation makes an election under this section (or is treated under subsection (e) as having made such an election), then, in the case of any qualified stock purchase, the target corporation
(1) shall be treated as having sold all of its assets at the close of the acquisition date at fair market value in a single transaction, and
(2) shall be treated as a new corporation which purchased all of the assets referred to in paragraph (1) as of the beginning of the day after the acquisition date.
(b) Basis of assets after deemed purchase 

(1) In general 
For purposes of subsection (a), the assets of the target corporation shall be treated as purchased for an amount equal to the sum of
(A) the grossed-up basis of the purchasing corporations recently purchased stock, and
(B) the basis of the purchasing corporations nonrecently purchased stock.
(2) Adjustment for liabilities and other relevant items 
The amount described in paragraph (1) shall be adjusted under regulations prescribed by the Secretary for liabilities of the target corporation and other relevant items.
(3) Election to step-up the basis of certain target stock 

(A) In general 
Under regulations prescribed by the Secretary, the basis of the purchasing corporations nonrecently purchased stock shall be the basis amount determined under subparagraph (B) of this paragraph if the purchasing corporation makes an election to recognize gain as if such stock were sold on the acquisition date for an amount equal to the basis amount determined under subparagraph (B).
(B) Determination of basis amount 
For purposes of subparagraph (A), the basis amount determined under this subparagraph shall be an amount equal to the grossed-up basis determined under subparagraph (A) of paragraph (1) multiplied by a fraction
(i) the numerator of which is the percentage of stock (by value) in the target corporation attributable to the purchasing corporations nonrecently purchased stock, and
(ii) the denominator of which is 100 percent minus the percentage referred to in clause (i).
(4) Grossed-up basis 
For purposes of paragraph (1), the grossed-up basis shall be an amount equal to the basis of the corporations recently purchased stock, multiplied by a fraction
(A) the numerator of which is 100 percent, minus the percentage of stock (by value) in the target corporation attributable to the purchasing corporations nonrecently purchased stock, and
(B) the denominator of which is the percentage of stock (by value) in the target corporation attributable to the purchasing corporations recently purchased stock.
(5) Allocation among assets 
The amount determined under paragraphs (1) and (2) shall be allocated among the assets of the target corporation under regulations prescribed by the Secretary.
(6) Definitions of recently purchased stock and nonrecently purchased stock 
For purposes of this subsection
(A) Recently purchased stock 
The term recently purchased stock means any stock in the target corporation which is held by the purchasing corporation on the acquisition date and which was purchased by such corporation during the 12-month acquisition period.
(B) Nonrecently purchased stock 
The term nonrecently purchased stock means any stock in the target corporation which is held by the purchasing corporation on the acquisition date and which is not recently purchased stock.
[(c) Repealed. Pub. L. 99–514, title VI, § 631(b)(2), Oct. 22, 1986, 100 Stat. 2272] 
(d) Purchasing corporation; target corporation; qualified stock purchase 
For purposes of this section
(1) Purchasing corporation 
The term purchasing corporation means any corporation which makes a qualified stock purchase of stock of another corporation.
(2) Target corporation 
The term target corporation means any corporation the stock of which is acquired by another corporation in a qualified stock purchase.
(3) Qualified stock purchase 
The term qualified stock purchase means any transaction or series of transactions in which stock (meeting the requirements of section 1504(a)(2)) of 1 corporation is acquired by another corporation by purchase during the 12-month acquisition period.
(e) Deemed election where purchasing corporation acquires asset of target corporation 

(1) In general 
A purchasing corporation shall be treated as having made an election under this section with respect to any target corporation if, at any time during the consistency period, it acquires any asset of the target corporation (or a target affiliate).
(2) Exceptions 
Paragraph (1) shall not apply with respect to any acquisition by the purchasing corporation if
(A) such acquisition is pursuant to a sale by the target corporation (or the target affiliate) in the ordinary course of its trade or business,
(B) the basis of the property acquired is determined wholly by reference to the adjusted basis of such property in the hands of the person from whom acquired,
(C) such acquisition was before September 1, 1982, or
(D) such acquisition is described in regulations prescribed by the Secretary and meets such conditions as such regulations may provide.
(3) Anti-avoidance rule 
Whenever necessary to carry out the purpose of this subsection and subsection (f), the Secretary may treat stock acquisitions which are pursuant to a plan and which meet the requirements of section 1504 (a)(2) as qualified stock purchases.
(f) Consistency required for all stock acquisitions from same affiliated group 
If a purchasing corporation makes qualified stock purchases with respect to the target corporation and 1 or more target affiliates during any consistency period, then (except as otherwise provided in subsection (e))
(1) any election under this section with respect to the first such purchase shall apply to each other such purchase, and
(2) no election may be made under this section with respect to the second or subsequent such purchase if such an election was not made with respect to the first such purchase.
(g) Election 

(1) When made 
Except as otherwise provided in regulations, an election under this section shall be made not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs.
(2) Manner 
An election by the purchasing corporation under this section shall be made in such manner as the Secretary shall by regulations prescribe.
(3) Election irrevocable 
An election by a purchasing corporation under this section, once made, shall be irrevocable.
(h) Definitions and special rules 
For purposes of this section
(1) 12-month acquisition period 
The term 12-month acquisition period means the 12-month period beginning with the date of the first acquisition by purchase of stock included in a qualified stock purchase (or, if any of such stock was acquired in an acquisition which is a purchase by reason of subparagraph (C) of paragraph (3), the date on which the acquiring corporation is first considered under section 318 (a) (other than paragraph (4) thereof) as owning stock owned by the corporation from which such acquisition was made).
(2) Acquisition date 
The term acquisition date means, with respect to any corporation, the first day on which there is a qualified stock purchase with respect to the stock of such corporation.
(3) Purchase 

(A) In general 
The term purchase means any acquisition of stock, but only if
(i) the basis of the stock in the hands of the purchasing corporation is not determined
(I)  in whole or in part by reference to the adjusted basis of such stock in the hands of the person from whom acquired, or
(II)  under section 1014 (a) (relating to property acquired from a decedent),
(ii) the stock is not acquired in an exchange to which section 351, 354, 355, or 356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain or loss realized on the transaction, and
(iii) the stock is not acquired from a person the ownership of whose stock would, under section 318 (a) (other than paragaraph[1] (4) thereof), be attributed to the person acquiring such stock.
(B) Deemed purchase under subsection (a) 
The term purchase includes any deemed purchase under subsection (a)(2). The acquisition date for a corporation which is deemed purchased under subsection (a)(2) shall be determined under regulations prescribed by the Secretary.
(C) Certain stock acquisitions from related corporations 

(i) In general Clause (iii) of subparagraph (A) shall not apply to an acquisition of stock from a related corporation if at least 50 percent in value of the stock of such related corporation was acquired by purchase (within the meaning of subparagraphs (A) and (B)).
(ii) Certain distributions Clause (i) of subparagraph (A) shall not apply to an acquisition of stock described in clause (i) of this subparagraph if the corporation acquiring such stock
(I) made a qualified stock purchase of stock of the related corporation, and
(II) made an election under this section (or is treated under subsection (e) as having made such an election) with respect to such qualified stock purchase.
(iii) Related corporation defined For purposes of this subparagraph, a corporation is a related corporation if stock owned by such corporation is treated (under section 318 (a) other than paragraph (4) thereof) as owned by the corporation acquiring the stock.
(4) Consistency period 

(A) In general 
Except as provided in subparagraph (B), the term consistency period means the period consisting of
(i) the 1-year period before the beginning of the 12-month acquisition period for the target corporation,
(ii) such acquisition period (up to and including the acquisition date), and
(iii) the 1-year period beginning on the day after the acquisition date.
(B) Extension where there is plan 
The period referred to in subparagraph (A) shall also include any period during which the Secretary determines that there was in effect a plan to make a qualified stock purchase plus 1 or more other qualified stock purchases (or asset acquisitions described in subsection (e)) with respect to the target corporation or any target affiliate.
(5) Affiliated group 
The term affiliated group has the meaning given to such term by section 1504 (a) (determined without regard to the exceptions contained in section 1504 (b)).
(6) Target affiliate 

(A) In general 
A corporation shall be treated as a target affiliate of the target corporation if each of such corporations was, at any time during so much of the consistency period as ends on the acquisition date of the target corporation, a member of an affiliated group which had the same common parent.
(B) Certain foreign corporations, etc. 
Except as otherwise provided in regulations (and subject to such conditions as may be provided in regulations)
(i) the term target affiliate does not include a foreign corporation, a DISC, or a corporation to which an election under section 936 applies, and
(ii) stock held by a target affiliate in a foreign corporation or a domestic corporation which is a DISC or described in section 1248 (e) shall be excluded from the operation of this section.
[(7) Repealed. Pub. L. 100–647, title I, § 1006(e)(20), Nov. 10, 1988, 102 Stat. 3403] 
(8) Acquisitions by affiliated group treated as made by 1 corporation 
Except as provided in regulations prescribed by the Secretary, stock and asset acquisitions made by members of the same affiliated group shall be treated as made by 1 corporation.
(9) Target not treated as member of affiliated group 
Except as otherwise provided in paragraph (10) or in regulations prescribed under this paragraph, the target corporation shall not be treated as a member of an affiliated group with respect to the sale described in subsection (a)(1).
(10) Elective recognition of gain or loss by target corporation, together with nonrecognition of gain or loss on stock sold by selling consolidated group 

(A) In general 
Under regulations prescribed by the Secretary, an election may be made under which if
(i) the target corporation was, before the transaction, a member of the selling consolidated group, and
(ii) the target corporation recognizes gain or loss with respect to the transaction as if it sold all of its assets in a single transaction,

then the target corporation shall be treated as a member of the selling consolidated group with respect to such sale, and (to the extent provided in regulations) no gain or loss will be recognized on stock sold or exchanged in the transaction by members of the selling consolidated group.

(B) Selling consolidated group 
For purposes of subparagraph (A), the term selling consolidated group means any group of corporations which (for the taxable period which includes the transaction)
(i) includes the target corporation, and
(ii) files a consolidated return.

To the extent provided in regulations, such term also includes any affiliated group of corporations which includes the target corporation (whether or not such group files a consolidated return).

(C) Information required to be furnished to the Secretary 
Under regulations, where an election is made under subparagraph (A), the purchasing corporation and the common parent of the selling consolidated group shall, at such times and in such manner as may be provided in regulations, furnish to the Secretary the following information:
(i) The amount allocated under subsection (b)(5) to goodwill or going concern value.
(ii) Any modification of the amount described in clause (i).
(iii) Any other information as the Secretary deems necessary to carry out the provisions of this paragraph.
(11) Elective formula for determining fair market value 
For purposes of subsection (a)(1), fair market value may be determined on the basis of a formula provided in regulations prescribed by the Secretary which takes into account liabilities and other relevant items.
[(12) Repealed. Pub. L. 99–514, title VI, § 631(e)(5), Oct. 22, 1986, 100 Stat. 2273] 
(13) Tax on deemed sale not taken into account for estimated tax purposes 
For purposes of section 6655, tax attributable to the sale described in subsection (a)(1) shall not be taken into account. The preceding sentence shall not apply with respect to a qualified stock purchase for which an election is made under paragraph (10).
[(14) Repealed. Pub. L. 108–27, title III, § 302(e)(4)(B)(i), May 28, 2003, 117 Stat. 763] 
(15) Combined deemed sale return 
Under regulations prescribed by the Secretary, a combined deemed sale return may be filed by all target corporations acquired by a purchasing corporation on the same acquisition date if such target corporations were members of the same selling consolidated group (as defined in subparagraph (B) of paragraph (10)).
(16) Coordination with foreign tax credit provisions 
Except as provided in regulations, this section shall not apply for purposes of determining the source or character of any item for purposes of subpart A of part III of subchapter N of this chapter (relating to foreign tax credit). The preceding sentence shall not apply to any gain to the extent such gain is includible in gross income as a dividend under section 1248 (determined without regard to any deemed sale under this section by a foreign corporation).
(i) Regulations 
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including
(1) regulations to ensure that the purpose of this section to require consistency of treatment of stock and asset sales and purchases may not be circumvented through the use of any provision of law or regulations (including the consolidated return regulations) and
(2) regulations providing for the coordination of the provisions of this section with the provision of this title relating to foreign corporations and their shareholders.
[1] So in original.

[Subpart C - Repealed]

26 USC 341 - Repealed. Pub. L. 10827, title III, 302(e)(4)(A), May 28, 2003, 117 Stat. 763]

Section, act Aug. 16, 1954, ch. 736, 68A Stat. 107; Pub. L. 85–866, title I, § 20(a), Sept. 2, 1958, 72 Stat. 1615; Pub. L. 87–834, § 13(f)(4), Oct. 16, 1962, 76 Stat. 1035; Pub. L. 88–272, title II, § 231(b)(4), Feb. 26, 1964, 78 Stat. 105; Pub. L. 88–484, § 1(a), Aug. 22, 1964, 78 Stat. 596; Pub. L. 89–570, § 1(b)(4), Sept. 12, 1966, 80 Stat. 762; Pub. L. 91–172, title II, § 211(b)(4), title V, 514(b)(1), Dec. 30, 1969, 83 Stat. 570, 643; Pub. L. 94–455, title II, § 205(c)(2), title XIV, 1402(b)(1)(B), (2), title XIX, 1901(b)(3)(A), (I), 1906 (b)(13)(A), Oct. 4, 1976, 90 Stat. 1535, 1731, 1732, 1792, 1793, 1834; Pub. L. 97–34, title V, § 505(c)(2), Aug. 13, 1981, 95 Stat. 332; Pub. L. 97–248, title II, § 222(e)(5), Sept. 3, 1982, 96 Stat. 480; Pub. L. 98–369, div. A, title I, 43(c)(1), 65 (a)(c), 135(a), title IV, 492(b)(2), title X, 1001(b)(2), (e), July 18, 1984, 98 Stat. 558, 584, 669, 854, 1011, 1012; Pub. L. 99–514, title VI, § 631(e)(6), title XVIII, 1804(i)(1), 1899A (8), Oct. 22, 1986, 100 Stat. 2273, 2807, 2958; Pub. L. 100–647, title I, § 1006(e)(18), Nov. 10, 1988, 102 Stat. 3403; Pub. L. 104–188, title I, § 1702(h)(7), Aug. 20, 1996, 110 Stat. 1874; Pub. L. 106–170, title V, § 532(c)(2)(D), Dec. 17, 1999, 113 Stat. 1930; Pub. L. 107–147, title IV, § 417(24)(B)(i), Mar. 9, 2002, 116 Stat. 57, related to collapsible corporations.

26 USC 342 - Repealed. Pub. L. 94455, title XIX, 1901(a)(47), Oct. 4, 1976, 90 Stat. 1772]

Section, act Aug. 16, 1954, ch. 736, 68A Stat. 110, related to liquidation of certain foreign personal holding companies.

Subpart D - Definition and Special Rule

26 USC 346 - Definition and special rule

(a) Complete liquidation 
For purposes of this subchapter, a distribution shall be treated as in complete liquidation of a corporation if the distribution is one of a series of distributions in redemption of all of the stock of the corporation pursuant to a plan.
(b) Transactions which might reach same result as partial liquidations 
The Secretary shall prescribe such regulations as may be necessary to ensure that the purposes of subsections (a) and (b) of section 222 of the Tax Equity and Fiscal Responsibility Act of 1982 (which repeal the special tax treatment for partial liquidations) may not be circumvented through the use of section 355, 351, or any other provision of law or regulations (including the consolidated return regulations).

TITLE 26 - US CODE - PART III - CORPORATE ORGANIZATIONS AND REORGANIZATIONS

Subpart A - Corporate Organizations

26 USC 351 - Transfer to corporation controlled by transferor

(a) General rule 
No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.
(b) Receipt of property 
If subsection (a) would apply to an exchange but for the fact that there is received, in addition to the stock permitted to be received under subsection (a), other property or money, then
(1) gain (if any) to such recipient shall be recognized, but not in excess of
(A) the amount of money received, plus
(B) the fair market value of such other property received; and
(2) no loss to such recipient shall be recognized.
(c) Special rules where distribution to shareholders 

(1) In general 
In determining control for purposes of this section, the fact that any corporate transferor distributes part or all of the stock in the corporation which it receives in the exchange to its shareholders shall not be taken into account.
(2) Special rule for section 355 
If the requirements of section 355 (or so much of section 356 as relates to section 355) are met with respect to a distribution described in paragraph (1), then, solely for purposes of determining the tax treatment of the transfers of property to the controlled corporation by the distributing corporation, the fact that the shareholders of the distributing corporation dispose of part or all of the distributed stock, or the fact that the corporation whose stock was distributed issues additional stock, shall not be taken into account in determining control for purposes of this section.
(d) Services, certain indebtedness, and accrued interest not treated as property 
For purposes of this section, stock issued for
(1) services,
(2) indebtedness of the transferee corporation which is not evidenced by a security, or
(3) interest on indebtedness of the transferee corporation which accrued on or after the beginning of the transferors holding period for the debt,

shall not be considered as issued in return for property.

(e) Exceptions 
This section shall not apply to
(1) Transfer of property to an investment company 
A transfer of property to an investment company. For purposes of the preceding sentence, the determination of whether a company is an investment company shall be made
(A) by taking into account all stock and securities held by the company, and
(B) by treating as stock and securities
(i) money,
(ii) stocks and other equity interests in a corporation, evidences of indebtedness, options, forward or futures contracts, notional principal contracts and derivatives,
(iii) any foreign currency,
(iv) any interest in a real estate investment trust, a common trust fund, a regulated investment company, a publicly-traded partnership (as defined in section 7704 (b)) or any other equity interest (other than in a corporation) which pursuant to its terms or any other arrangement is readily convertible into, or exchangeable for, any asset described in any preceding clause, this clause or clause (v) or (viii),
(v) except to the extent provided in regulations prescribed by the Secretary, any interest in a precious metal, unless such metal is used or held in the active conduct of a trade or business after the contribution,
(vi) except as otherwise provided in regulations prescribed by the Secretary, interests in any entity if substantially all of the assets of such entity consist (directly or indirectly) of any assets described in any preceding clause or clause (viii),
(vii) to the extent provided in regulations prescribed by the Secretary, any interest in any entity not described in clause (vi), but only to the extent of the value of such interest that is attributable to assets listed in clauses (i) through (v) or clause (viii), or
(viii) any other asset specified in regulations prescribed by the Secretary.

The Secretary may prescribe regulations that, under appropriate circumstances, treat any asset described in clauses (i) through (v) as not so listed.

(2) Title 11 or similar case 
A transfer of property of a debtor pursuant to a plan while the debtor is under the jurisdiction of a court in a title 11 or similar case (within the meaning of section 368 (a)(3)(A)), to the extent that the stock received in the exchange is used to satisfy the indebtedness of such debtor.
(f) Treatment of controlled corporation 
If
(1) property is transferred to a corporation (hereinafter in this subsection referred to as the controlled corporation) in an exchange with respect to which gain or loss is not recognized (in whole or in part) to the transferor under this section, and
(2) such exchange is not in pursuance of a plan of reorganization,

section 311 shall apply to any transfer in such exchange by the controlled corporation in the same manner as if such transfer were a distribution to which subpart A of part I applies.

(g) Nonqualified preferred stock not treated as stock 

(1) In general 
In the case of a person who transfers property to a corporation and receives nonqualified preferred stock
(A) subsection (a) shall not apply to such transferor, and
(B) if (and only if) the transferor receives stock other than nonqualified preferred stock
(i) subsection (b) shall apply to such transferor; and
(ii) such nonqualified preferred stock shall be treated as other property for purposes of applying subsection (b).
(2) Nonqualified preferred stock 
For purposes of paragraph (1)
(A) In general 
The term nonqualified preferred stock means preferred stock if
(i) the holder of such stock has the right to require the issuer or a related person to redeem or purchase the stock,
(ii) the issuer or a related person is required to redeem or purchase such stock,
(iii) the issuer or a related person has the right to redeem or purchase the stock and, as of the issue date, it is more likely than not that such right will be exercised, or
(iv) the dividend rate on such stock varies in whole or in part (directly or indirectly) with reference to interest rates, commodity prices, or other similar indices.
(B) Limitations 
Clauses (i), (ii), and (iii) of subparagraph (A) shall apply only if the right or obligation referred to therein may be exercised within the 20-year period beginning on the issue date of such stock and such right or obligation is not subject to a contingency which, as of the issue date, makes remote the likelihood of the redemption or purchase.
(C) Exceptions for certain rights or obligations 

(i) In general A right or obligation shall not be treated as described in clause (i), (ii), or (iii) of subparagraph (A) if
(I) it may be exercised only upon the death, disability, or mental incompetency of the holder, or
(II) in the case of a right or obligation to redeem or purchase stock transferred in connection with the performance of services for the issuer or a related person (and which represents reasonable compensation), it may be exercised only upon the holders separation from service from the issuer or a related person.
(ii) Exception Clause (i)(I) shall not apply if the stock relinquished in the exchange, or the stock acquired in the exchange is in
(I) a corporation if any class of stock in such corporation or a related party is readily tradable on an established securities market or otherwise, or
(II) any other corporation if such exchange is part of a transaction or series of transactions in which such corporation is to become a corporation described in subclause (I).
(3) Definitions 
For purposes of this subsection
(A) Preferred stock 
The term preferred stock means stock which is limited and preferred as to dividends and does not participate in corporate growth to any significant extent. Stock shall not be treated as participating in corporate growth to any significant extent unless there is a real and meaningful likelihood of the shareholder actually participating in the earnings and growth of the corporation. If there is not a real and meaningful likelihood that dividends beyond any limitation or preference will actually be paid, the possibility of such payments will be disregarded in determining whether stock is limited and preferred as to dividends.
(B) Related person 
A person shall be treated as related to another person if they bear a relationship to such other person described in section 267 (b) or 707 (b).
(4) Regulations 
The Secretary may prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection and sections 354 (a)(2)(C), 355 (a)(3)(D), and 356 (e). The Secretary may also prescribe regulations, consistent with the treatment under this subsection and such sections, for the treatment of nonqualified preferred stock under other provisions of this title.
(h) Cross references 

(1) For special rule where another party to the exchange assumes a liability, see section 357.
(2) For the basis of stock or property received in an exchange to which this section applies, see sections 358 and 362.
(3) For special rule in the case of an exchange described in this section but which results in a gift, see section 2501 and following.
(4) For special rule in the case of an exchange described in this section but which has the effect of the payment of compensation by the corporation or by a transferor, see section 61 (a)(1).
(5) For coordination of this section with section 304, see section 304 (b)(3).

Subpart B - Effects on Shareholders and Security Holders

26 USC 354 - Exchanges of stock and securities in certain reorganizations

(a) General rule 

(1) In general 
No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
(2) Limitation 

(A) Excess principal amount 
Paragraph (1) shall not apply if
(i) the principal amount of any such securities received exceeds the principal amount of any such securities surrendered, or
(ii) any such securities are received and no such securities are surrendered.
(B) Property attributable to accrued interest 
Neither paragraph (1) nor so much of section 356 as relates to paragraph (1) shall apply to the extent that any stock (including nonqualified preferred stock, as defined in section 351 (g)(2)), securities, or other property received is attributable to interest which has accrued on securities on or after the beginning of the holders holding period.
(C) Nonqualified preferred stock 

(i) In general Nonqualified preferred stock (as defined in section 351 (g)(2)) received in exchange for stock other than nonqualified preferred stock (as so defined) shall not be treated as stock or securities.
(ii) Recapitalizations of family-owned corporations
(I) In general Clause (i) shall not apply in the case of a recapitalization under section 368(a)(1)(E) of a family-owned corporation.
(II) Family-owned corporation For purposes of this clause, except as provided in regulations, the term family-owned corporation means any corporation which is described in clause (i) of section 447 (d)(2)(C) throughout the 8-year period beginning on the date which is 5 years before the date of the recapitalization. For purposes of the preceding sentence, stock shall not be treated as owned by a family member during any period described in section 355 (d)(6)(B).
(III) Extension of statute of limitations The statutory period for the assessment of any deficiency attributable to a corporation failing to be a family-owned corporation shall not expire before the expiration of 3 years after the date the Secretary is notified by the corporation (in such manner as the Secretary may prescribe) of such failure, and such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.
(3) Cross references 

(A) For treatment of the exchange if any property is received which is not permitted to be received under this subsection (including nonqualified preferred stock and an excess principal amount of securities received over securities surrendered, but not including property to which paragraph (2)(B) applies), see section 356.
(B) For treatment of accrued interest in the case of an exchange described in paragraph (2)(B), see section 61.
(b) Exception 

(1) In general 
Subsection (a) shall not apply to an exchange in pursuance of a plan of reorganization within the meaning of subparagraph (D) or (G) of section 368 (a)(1), unless
(A) the corporation to which the assets are transferred acquires substantially all of the assets of the transferor of such assets; and
(B) the stock, securities, and other properties received by such transferor, as well as the other properties of such transferor, are distributed in pursuance of the plan of reorganization.
(2) Cross reference 
For special rules for certain exchanges in pursuance of plans of reorganization within the meaning of subparagraph (D) or (G) of section 368 (a)(1), see section 355.
(c) Certain railroad reorganizations 
Notwithstanding any other provision of this subchapter, subsection (a)(1) (and so much of section 356 as relates to this section) shall apply with respect to a plan of reorganization (whether or not a reorganization within the meaning of section 368 (a)) for a railroad confirmed under section 1173 of title 11 of the United States Code, as being in the public interest.

26 USC 355 - Distribution of stock and securities of a controlled corporation

(a) Effect on distributees 

(1) General rule 
If
(A) a corporation (referred to in this section as the distributing corporation)
(i) distributes to a shareholder, with respect to its stock, or
(ii) distributes to a security holder, in exchange for its securities,

solely stock or securities of a corporation (referred to in this section as controlled corporation) which it controls immediately before the distribution,

(B) the transaction was not used principally as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation or both (but the mere fact that subsequent to the distribution stock or securities in one or more of such corporations are sold or exchanged by all or some of the distributees (other than pursuant to an arrangement negotiated or agreed upon prior to such distribution) shall not be construed to mean that the transaction was used principally as such a device),
(C) the requirements of subsection (b) (relating to active businesses) are satisfied, and
(D) as part of the distribution, the distributing corporation distributes
(i) all of the stock and securities in the controlled corporation held by it immediately before the distribution, or
(ii) an amount of stock in the controlled corporation constituting control within the meaning of section 368 (c), and it is established to the satisfaction of the Secretary that the retention by the distributing corporation of stock (or stock and securities) in the controlled corporation was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax,

then no gain or loss shall be recognized to (and no amount shall be includible in the income of) such shareholder or security holder on the receipt of such stock or securities.

(2) Non pro rata distributions, etc. 
Paragraph (1) shall be applied without regard to the following:
(A) whether or not the distribution is pro rata with respect to all of the shareholders of the distributing corporation,
(B) whether or not the shareholder surrenders stock in the distributing corporation, and
(C) whether or not the distribution is in pursuance of a plan of reorganization (within the meaning of section 368 (a)(1)(D)).
(3) Limitations 

(A) Excess principal amount 
Paragraph (1) shall not apply if
(i) the principal amount of the securities in the controlled corporation which are received exceeds the principal amount of the securities which are surrendered in connection with such distribution, or
(ii) securities in the controlled corporation are received and no securities are surrendered in connection with such distribution.
(B) Stock acquired in taxable transactions within 5 years treated as boot 
For purposes of this section (other than paragraph (1)(D) of this subsection) and so much of section 356 as relates to this section, stock of a controlled corporation acquired by the distributing corporation by reason of any transaction
(i) which occurs within 5 years of the distribution of such stock, and
(ii) in which gain or loss was recognized in whole or in part,

shall not be treated as stock of such controlled corporation, but as other property.

(C) Property attributable to accrued interest 
Neither paragraph (1) nor so much of section 356 as relates to paragraph (1) shall apply to the extent that any stock (including nonqualified preferred stock, as defined in section 351 (g)(2)), securities, or other property received is attributable to interest which has accrued on securities on or after the beginning of the holders holding period.
(D) Nonqualified preferred stock 
Nonqualified preferred stock (as defined in section 351 (g)(2)) received in a distribution with respect to stock other than nonqualified preferred stock (as so defined) shall not be treated as stock or securities.
(4) Cross references 

(A) For treatment of the exchange if any property is received which is not permitted to be received under this subsection (including nonqualified preferred stock and an excess principal amount of securities received over securities surrendered, but not including property to which paragraph (3)(C) applies), see section 356.
(B) For treatment of accrued interest in the case of an exchange described in paragraph (3)(C), see section 61.
(b) Requirements as to active business 

(1) In general 
Subsection (a) shall apply only if either
(A) the distributing corporation, and the controlled corporation (or, if stock of more than one controlled corporation is distributed, each of such corporations), is engaged immediately after the distribution in the active conduct of a trade or business, or
(B) immediately before the distribution, the distributing corporation had no assets other than stock or securities in the controlled corporations and each of the controlled corporations is engaged immediately after the distribution in the active conduct of a trade or business.
(2) Definition 
For purposes of paragraph (1), a corporation shall be treated as engaged in the active conduct of a trade or business if and only if
(A) it is engaged in the active conduct of a trade or business,
(B) such trade or business has been actively conducted throughout the 5-year period ending on the date of the distribution,
(C) such trade or business was not acquired within the period described in subparagraph (B) in a transaction in which gain or loss was recognized in whole or in part, and
(D) control of a corporation which (at the time of acquisition of control) was conducting such trade or business
(i) was not acquired by any distributee corporation directly (or through 1 or more corporations, whether through the distributing corporation or otherwise) within the period described in subparagraph (B) and was not acquired by the distributing corporation directly (or through 1 or more corporations) within such period, or
(ii) was so acquired by any such corporation within such period, but, in each case in which such control was so acquired, it was so acquired, only by reason of transactions in which gain or loss was not recognized in whole or in part, or only by reason of such transactions combined with acquisitions before the beginning of such period.

For purposes of subparagraph (D), all distributee corporations which are members of the same affiliated group (as defined in section 1504 (a) without regard to section 1504 (b)) shall be treated as 1 distributee corporation.

(3) Special rules for determining active conduct in the case of affiliated groups 

(A) In general 
For purposes of determining whether a corporation meets the requirements of paragraph (2)(A), all members of such corporations separate affiliated group shall be treated as one corporation.
(B) Separate affiliated group 
For purposes of this paragraph, the term separate affiliated group means, with respect to any corporation, the affiliated group which would be determined under section 1504 (a) if such corporation were the common parent and section 1504 (b) did not apply.
(C) Treatment of trade or business conducted by acquired member 
If a corporation became a member of a separate affiliated group as a result of one or more transactions in which gain or loss was recognized in whole or in part, any trade or business conducted by such corporation (at the time that such corporation became such a member) shall be treated for purposes of paragraph (2) as acquired in a transaction in which gain or loss was recognized in whole or in part.
(D) Regulations 
The Secretary shall prescribe such regulations as are necessary or appropriate to carry out the purposes of this paragraph, including regulations which provide for the proper application of subparagraphs (B), (C), and (D) of paragraph (2), and modify the application of subsection (a)(3)(B), in connection with the application of this paragraph.
(c) Taxability of corporation on distribution 

(1) In general 
Except as provided in paragraph (2), no gain or loss shall be recognized to a corporation on any distribution to which this section (or so much of section 356 as relates to this section) applies and which is not in pursuance of a plan of reorganization.
(2) Distribution of appreciated property 

(A) In general 
If
(i) in a distribution referred to in paragraph (1), the corporation distributes property other than qualified property, and
(ii) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation),

then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value.

(B) Qualified property 
For purposes of subparagraph (A), the term qualified property means any stock or securities in the controlled corporation.
(C) Treatment of liabilities 
If any property distributed in the distribution referred to in paragraph (1) is subject to a liability or the shareholder assumes a liability of the distributing corporation in connection with the distribution, then, for purposes of subparagraph (A), the fair market value of such property shall be treated as not less than the amount of such liability.
(3) Coordination with sections 311 and 336 (a) 
Sections 311 and 336 (a) shall not apply to any distribution referred to in paragraph (1).
(d) Recognition of gain on certain distributions of stock or securities in controlled corporation 

(1) In general 
In the case of a disqualified distribution, any stock or securities in the controlled corporation shall not be treated as qualified property for purposes of subsection (c)(2) of this section or section 361 (c)(2).
(2) Disqualified distribution 
For purposes of this subsection, the term disqualified distribution means any distribution to which this section (or so much of section 356 as relates to this section) applies if, immediately after the distribution
(A) any person holds disqualified stock in the distributing corporation which constitutes a 50-percent or greater interest in such corporation, or
(B) any person holds disqualified stock in the controlled corporation (or, if stock of more than 1 controlled corporation is distributed, in any controlled corporation) which constitutes a 50-percent or greater interest in such corporation.
(3) Disqualified stock 
For purposes of this subsection, the term disqualified stock means
(A) any stock in the distributing corporation acquired by purchase after October 9, 1990, and during the 5-year period ending on the date of the distribution, and
(B) any stock in any controlled corporation
(i) acquired by purchase after October 9, 1990, and during the 5-year period ending on the date of the distribution, or
(ii) received in the distribution to the extent attributable to distributions on
(I) stock described in subparagraph (A), or
(II) any securities in the distributing corporation acquired by purchase after October 9, 1990, and during the 5-year period ending on the date of the distribution.
(4) 50-percent or greater interest 
For purposes of this subsection, the term 50-percent or greater interest means stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock.
(5) Purchase 
For purposes of this subsection
(A) In general 
Except as otherwise provided in this paragraph, the term purchase means any acquisition but only if
(i) the basis of the property acquired in the hands of the acquirer is not determined
(I)  in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or
(II)  under section 1014 (a), and
(ii) the property is not acquired in an exchange to which section 351, 354, 355, or 356 applies.
(B) Certain section 351 exchanges treated as purchases 
The term purchase includes any acquisition of property in an exchange to which section 351 applies to the extent such property is acquired in exchange for
(i) any cash or cash item,
(ii) any marketable stock or security, or
(iii) any debt of the transferor.
(C) Carryover basis transactions 
If
(i) any person acquires property from another person who acquired such property by purchase (as determined under this paragraph with regard to this subparagraph), and
(ii) the adjusted basis of such property in the hands of such acquirer is determined in whole or in part by reference to the adjusted basis of such property in the hands of such other person,

such acquirer shall be treated as having acquired such property by purchase on the date it was so acquired by such other person.

(6) Special rule where substantial diminution of risk 

(A) In general 
If this paragraph applies to any stock or securities for any period, the running of any 5-year period set forth in subparagraph (A) or (B) of paragraph (3) (whichever applies) shall be suspended during such period.
(B) Property to which suspension applies 
This paragraph applies to any stock or securities for any period during which the holders risk of loss with respect to such stock or securities, or with respect to any portion of the activities of the corporation, is (directly or indirectly) substantially diminished by
(i) an option,
(ii) a short sale,
(iii) any special class of stock, or
(iv) any other device or transaction.
(7) Aggregation rules 

(A) In general 
For purposes of this subsection, a person and all persons related to such person (within the meaning of section 267 (b) or 707 (b)(1)) shall be treated as one person.
(B) Persons acting pursuant to plans or arrangements 
If two or more persons act pursuant to a plan or arrangement with respect to acquisitions of stock or securities in the distributing corporation or controlled corporation, such persons shall be treated as one person for purposes of this subsection.
(8) Attribution from entities 

(A) In general 
Paragraph (2) of section 318 (a) shall apply in determining whether a person holds stock or securities in any corporation (determined by substituting 10 percent for 50 percent in subparagraph (C) of such paragraph (2) and by treating any reference to stock as including a reference to securities).
(B) Deemed purchase rule 
If
(i) any person acquires by purchase an interest in any entity, and
(ii) such person is treated under subparagraph (A) as holding any stock or securities by reason of holding such interest,

such stock or securities shall be treated as acquired by purchase by such person on the later of the date of the purchase of the interest in such entity or the date such stock or securities are acquired by purchase by such entity.

(9) Regulations 
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including
(A) regulations to prevent the avoidance of the purposes of this subsection through the use of related persons, intermediaries, pass-thru entities, options, or other arrangements, and
(B) regulations modifying the definition of the term purchase.
(e) Recognition of gain on certain distributions of stock or securities in connection with acquisitions 

(1) General rule 
If there is a distribution to which this subsection applies, any stock or securities in the controlled corporation shall not be treated as qualified property for purposes of subsection (c)(2) of this section or section 361 (c)(2).
(2) Distributions to which subsection applies 

(A) In general 
This subsection shall apply to any distribution
(i) to which this section (or so much of section 356 as relates to this section) applies, and
(ii) which is part of a plan (or series of related transactions) pursuant to which 1 or more persons acquire directly or indirectly stock representing a 50-percent or greater interest in the distributing corporation or any controlled corporation.
(B) Plan presumed to exist in certain cases 
If 1 or more persons acquire directly or indirectly stock representing a 50-percent or greater interest in the distributing corporation or any controlled corporation during the 4-year period beginning on the date which is 2 years before the date of the distribution, such acquisition shall be treated as pursuant to a plan described in subparagraph (A)(ii) unless it is established that the distribution and the acquisition are not pursuant to a plan or series of related transactions.
(C) Certain plans disregarded 
A plan (or series of related transactions) shall not be treated as described in subparagraph (A)(ii) if, immediately after the completion of such plan or transactions, the distributing corporation and all controlled corporations are members of a single affiliated group (as defined in section 1504 without regard to subsection (b) thereof).
(D) Coordination with subsection (d) 
This subsection shall not apply to any distribution to which subsection (d) applies.
(3) Special rules relating to acquisitions 

(A) Certain acquisitions not taken into account 
Except as provided in regulations, the following acquisitions shall not be taken into account in applying paragraph (2)(A)(ii):
(i) The acquisition of stock in any controlled corporation by the distributing corporation.
(ii) The acquisition by a person of stock in any controlled corporation by reason of holding stock or securities in the distributing corporation.
(iii) The acquisition by a person of stock in any successor corporation of the distributing corporation or any controlled corporation by reason of holding stock or securities in such distributing or controlled corporation.
(iv) The acquisition of stock in the distributing corporation or any controlled corporation to the extent that the percentage of stock owned directly or indirectly in such corporation by each person owning stock in such corporation immediately before the acquisition does not decrease.

This subparagraph shall not apply to any acquisition if the stock held before the acquisition was acquired pursuant to a plan (or series of related transactions) described in paragraph (2)(A)(ii).

(B) Asset acquisitions 
Except as provided in regulations, for purposes of this subsection, if the assets of the distributing corporation or any controlled corporation are acquired by a successor corporation in a transaction described in subparagraph (A), (C), or (D) of section 368 (a)(1) or any other transaction specified in regulations by the Secretary, the shareholders (immediately before the acquisition) of the corporation acquiring such assets shall be treated as acquiring stock in the corporation from which the assets were acquired.
(4) Definition and special rules 
For purposes of this subsection
(A) 50-percent or greater interest 
The term 50-percent or greater interest has the meaning given such term by subsection (d)(4).
(B) Distributions in title 11 or similar case 
Paragraph (1) shall not apply to any distribution made in a title 11 or similar case (as defined in section 368 (a)(3)).
(C) Aggregation and attribution rules 

(i) Aggregation The rules of paragraph (7)(A) of subsection (d) shall apply.
(ii) Attribution Section 318 (a)(2) shall apply in determining whether a person holds stock or securities in any corporation. Except as provided in regulations, section 318 (a)(2)(C) shall be applied without regard to the phrase 50 percent or more in value for purposes of the preceding sentence.
(D) Successors and predecessors 
For purposes of this subsection, any reference to a controlled corporation or a distributing corporation shall include a reference to any predecessor or successor of such corporation.
(E) Statute of limitations 
If there is a distribution to which paragraph (1) applies
(i) the statutory period for the assessment of any deficiency attributable to any part of the gain recognized under this subsection by reason of such distribution shall not expire before the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) that such distribution occurred, and
(ii) such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.
(5) Regulations 
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations
(A) providing for the application of this subsection where there is more than 1 controlled corporation,
(B) treating 2 or more distributions as 1 distribution where necessary to prevent the avoidance of such purposes, and
(C) providing for the application of rules similar to the rules of subsection (d)(6) where appropriate for purposes of paragraph (2)(B).
(f) Section not to apply to certain intragroup distributions 
Except as provided in regulations, this section (or so much of section 356 as relates to this section) shall not apply to the distribution of stock from 1 member of an affiliated group (as defined in section 1504 (a)) to another member of such group if such distribution is part of a plan (or series of related transactions) described in subsection (e)(2)(A)(ii) (determined after the application of subsection (e)).
(g) Section not to apply to distributions involving disqualified investment corporations 

(1) In general 
This section (and so much of section 356 as relates to this section) shall not apply to any distribution which is part of a transaction if
(A) either the distributing corporation or controlled corporation is, immediately after the transaction, a disqualified investment corporation, and
(B) any person holds, immediately after the transaction, a 50-percent or greater interest in any disqualified investment corporation, but only if such person did not hold such an interest in such corporation immediately before the transaction.
(2) Disqualified investment corporation 
For purposes of this subsection
(A) In general 
The term disqualified investment corporation means any distributing or controlled corporation if the fair market value of the investment assets of the corporation is
(i) in the case of distributions after the end of the 1-year period beginning on the date of the enactment of this subsection, 2/3 or more of the fair market value of all assets of the corporation, and
(ii) in the case of distributions during such 1-year period, 3/4 or more of the fair market value of all assets of the corporation.
(B) Investment assets 

(i) In general Except as otherwise provided in this subparagraph, the term investment assets means
(I) cash,
(II) any stock or securities in a corporation,
(III) any interest in a partnership,
(IV) any debt instrument or other evidence of indebtedness,
(V) any option, forward or futures contract, notional principal contract, or derivative,
(VI) foreign currency, or
(VII) any similar asset.
(ii) Exception for assets used in active conduct of certain financial trades or businesses Such term shall not include any asset which is held for use in the active and regular conduct of
(I) a lending or finance business (within the meaning of section 954 (h)(4)),
(II) a banking business through a bank (as defined in section 581), a domestic building and loan association (within the meaning of section 7701 (a)(19)), or any similar institution specified by the Secretary, or
(III) an insurance business if the conduct of the business is licensed, authorized, or regulated by an applicable insurance regulatory body.

This clause shall only apply with respect to any business if substantially all of the income of the business is derived from persons who are not related (within the meaning of section 267 (b) or 707 (b)(1)) to the person conducting the business.

(iii) Exception for securities marked to market Such term shall not include any security (as defined in section 475 (c)(2)) which is held by a dealer in securities and to which section 475 (a) applies.
(iv) Stock or securities in a 20-percent controlled entity
(I) In general Such term shall not include any stock and securities in, or any asset described in subclause (IV) or (V) of clause (i) issued by, a corporation which is a 20-percent controlled entity with respect to the distributing or controlled corporation.
(II) Look-thru rule The distributing or controlled corporation shall, for purposes of applying this subsection, be treated as owning its ratable share of the assets of any 20-percent controlled entity.
(III) 20-percent controlled entity For purposes of this clause, the term 20-percent controlled entity means, with respect to any distributing or controlled corporation, any corporation with respect to which the distributing or controlled corporation owns directly or indirectly stock meeting the requirements of section 1504 (a)(2), except that such section shall be applied by substituting 20 percent for 80 percent and without regard to stock described in section 1504 (a)(4).
(v) Interests in certain partnerships
(I) In general Such term shall not include any interest in a partnership, or any debt instrument or other evidence of indebtedness, issued by the partnership, if 1 or more of the trades or businesses of the partnership are (or, without regard to the 5-year requirement under subsection (b)(2)(B), would be) taken into account by the distributing or controlled corporation, as the case may be, in determining whether the requirements of subsection (b) are met with respect to the distribution.
(II) Look-thru rule The distributing or controlled corporation shall, for purposes of applying this subsection, be treated as owning its ratable share of the assets of any partnership described in subclause (I).
(3) 50-percent or greater interest 
For purposes of this subsection
(A) In general 
The term 50-percent or greater interest has the meaning given such term by subsection (d)(4).
(B) Attribution rules 
The rules of section 318 shall apply for purposes of determining ownership of stock for purposes of this paragraph.
(4) Transaction 
For purposes of this subsection, the term transaction includes a series of transactions.
(5) Regulations 
The Secretary shall prescribe such regulations as may be necessary to carry out, or prevent the avoidance of, the purposes of this subsection, including regulations
(A) to carry out, or prevent the avoidance of, the purposes of this subsection in cases involving
(i) the use of related persons, intermediaries, pass-thru entities, options, or other arrangements, and
(ii) the treatment of assets unrelated to the trade or business of a corporation as investment assets if, prior to the distribution, investment assets were used to acquire such unrelated assets,
(B) which in appropriate cases exclude from the application of this subsection a distribution which does not have the character of a redemption which would be treated as a sale or exchange under section 302, and
(C) which modify the application of the attribution rules applied for purposes of this subsection.

26 USC 356 - Receipt of additional consideration

(a) Gain on exchanges 

(1) Recognition of gain 
If
(A) section 354 or 355 would apply to an exchange but for the fact that
(B) the property received in the exchange consists not only of property permitted by section 354 or 355 to be received without the recognition of gain but also of other property or money,

then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

(2) Treatment as dividend 
If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend (determined with the application of section 318 (a)), then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.
(b) Additional consideration received in certain distributions 
If
(1) section 355 would apply to a distribution but for the fact that
(2) the property received in the distribution consists not only of property permitted by section 355 to be received without the recognition of gain, but also of other property or money,

then an amount equal to the sum of such money and the fair market value of such other property shall be treated as a distribution of property to which section 301 applies.

(c) Loss 
If
(1) section 354 would apply to an exchange or section 355 would apply to an exchange or distribution, but for the fact that
(2) the property received in the exchange or distribution consists not only of property permitted by section 354 or 355 to be received without the recognition of gain or loss, but also of other property or money,

then no loss from the exchange or distribution shall be recognized.

(d) Securities as other property 
For purposes of this section
(1) In general 
Except as provided in paragraph (2), the term other property includes securities.
(2) Exceptions 

(A) Securities with respect to which nonrecognition of gain would be permitted 
The term other property does not include securities to the extent that, under section 354 or 355, such securities would be permitted to be received without the recognition of gain.
(B) Greater principal amount in section 354 exchange 
If
(i) in an exchange described in section 354 (other than subsection (c) thereof), securities of a corporation a party to the reorganization are surrendered and securities of any corporation a party to the reorganization are received, and
(ii) the principal amount of such securities received exceeds the principal amount of such securities surrendered,

then, with respect to such securities received, the term other property means only the fair market value of such excess. For purposes of this subparagraph and subparagraph (C) if no securities are surrendered, the excess shall be the entire principal amount of the securities received.

(C) Greater principal amount in section 355 transaction 
If, in an exchange or distribution described in section 355, the principal amount of the securities in the controlled corporation which are received exceeds the principal amount of the securities in the distributing corporation which are surrendered, then, with respect to such securities received, the term other property means only the fair market value of such excess.
(e) Nonqualified preferred stock treated as other property 
For purposes of this section
(1) In general 
Except as provided in paragraph (2), the term other property includes nonqualified preferred stock (as defined in section 351 (g)(2)).
(2) Exception 
The term other property does not include nonqualified preferred stock (as so defined) to the extent that, under section 354 or 355, such preferred stock would be permitted to be received without the recognition of gain.
(f) Exchanges for section 306 stock 
Notwithstanding any other provision of this section, to the extent that any of the other property (or money) is received in exchange for section 306 stock, an amount equal to the fair market value of such other property (or the amount of such money) shall be treated as a distribution of property to which section 301 applies.
(g) Transactions involving gift or compensation 
For special rules for a transaction described in section 354, 355, or this section, but which
(1) results in a gift, see section 2501 and following, or
(2) has the effect of the payment of compensation, see section 61 (a)(1).

26 USC 357 - Assumption of liability

(a) General rule 
Except as provided in subsections (b) and (c), if
(1) the taxpayer receives property which would be permitted to be received under section 351 or 361 without the recognition of gain if it were the sole consideration, and
(2) as part of the consideration, another party to the exchange assumes a liability of the taxpayer,

then such assumption shall not be treated as money or other property, and shall not prevent the exchange from being within the provisions of section 351 or 361, as the case may be.

(b) Tax avoidance purpose 

(1) In general 
If, taking into consideration the nature of the liability and the circumstances in the light of which the arrangement for the assumption was made, it appears that the principal purpose of the taxpayer with respect to the assumption described in subsection (a)
(A) was a purpose to avoid Federal income tax on the exchange, or
(B) if not such purpose, was not a bona fide business purpose,

then such assumption (in the total amount of the liability assumed pursuant to such exchange) shall, for purposes of section 351 or 361 (as the case may be), be considered as money received by the taxpayer on the exchange.

(2) Burden of proof 
In any suit or proceeding where the burden is on the taxpayer to prove such assumption is not to be treated as money received by the taxpayer, such burden shall not be considered as sustained unless the taxpayer sustains such burden by the clear preponderance of the evidence.
(c) Liabilities in excess of basis 

(1) In general 
In the case of an exchange
(A) to which section 351 applies, or
(B) to which section 361 applies by reason of a plan of reorganization within the meaning of section 368 (a)(1)(D) with respect to which stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 355,

if the sum of the amount of the liabilities assumed exceeds the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be.

(2) Exceptions 
Paragraph (1) shall not apply to any exchange
(A) to which subsection (b)(1) of this section applies, or
(B) which is pursuant to a plan of reorganization within the meaning of section 368 (a)(1)(G) where no former shareholder of the transferor corporation receives any consideration for his stock.
(3) Certain liabilities excluded 

(A) In general 
If a taxpayer transfers, in an exchange to which section 351 applies, a liability the payment of which either
(i) would give rise to a deduction, or
(ii) would be described in section 736 (a),

then, for purposes of paragraph (1), the amount of such liability shall be excluded in determining the amount of liabilities assumed.

(B) Exception 
Subparagraph (A) shall not apply to any liability to the extent that the incurrence of the liability resulted in the creation of, or an increase in, the basis of any property.
(d) Determination of amount of liability assumed 

(1) In general 
For purposes of this section, section 358 (d), section 358(h), section 361 (b)(3), section 362(d), section 368 (a)(1)(C), and section 368 (a)(2)(B), except as provided in regulations
(A) a recourse liability (or portion thereof) shall be treated as having been assumed if, as determined on the basis of all facts and circumstances, the transferee has agreed to, and is expected to, satisfy such liability (or portion), whether or not the transferor has been relieved of such liability; and
(B) except to the extent provided in paragraph (2), a nonrecourse liability shall be treated as having been assumed by the transferee of any asset subject to such liability.
(2) Exception for nonrecourse liability 
The amount of the nonrecourse liability treated as described in paragraph (1)(B) shall be reduced by the lesser of
(A) the amount of such liability which an owner of other assets not transferred to the transferee and also subject to such liability has agreed with the transferee to, and is expected to, satisfy; or
(B) the fair market value of such other assets (determined without regard to section 7701 (g)).
(3) Regulations 
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection and section 362 (d). The Secretary may also prescribe regulations which provide that the manner in which a liability is treated as assumed under this subsection is applied, where appropriate, elsewhere in this title.

26 USC 358 - Basis to distributees

(a) General rule 
In the case of an exchange to which section 351, 354, 355, 356, or 361 applies
(1) Nonrecognition property 
The basis of the property permitted to be received under such section without the recognition of gain or loss shall be the same as that of the property exchanged
(A) decreased by
(i) the fair market value of any other property (except money) received by the taxpayer,
(ii) the amount of any money received by the taxpayer, and
(iii) the amount of loss to the taxpayer which was recognized on such exchange, and
(B) increased by
(i) the amount which was treated as a dividend, and
(ii) the amount of gain to the taxpayer which was recognized on such exchange (not including any portion of such gain which was treated as a dividend).
(2) Other property 
The basis of any other property (except money) received by the taxpayer shall be its fair market value.
(b) Allocation of basis 

(1) In general 
Under regulations prescribed by the Secretary, the basis determined under subsection (a)(1) shall be allocated among the properties permitted to be received without the recognition of gain or loss.
(2) Special rule for section 355 
In the case of an exchange to which section 355 (or so much of section 356 as relates to section 355) applies, then in making the allocation under paragraph (1) of this subsection, there shall be taken into account not only the property so permitted to be received without the recognition of gain or loss, but also the stock or securities (if any) of the distributing corporation which are retained, and the allocation of basis shall be made among all such properties.
(c) Section 355 transactions which are not exchanges 
For purposes of this section, a distribution to which section 355 (or so much of section 356 as relates to section 355) applies shall be treated as an exchange, and for such purposes the stock and securities of the distributing corporation which are retained shall be treated as surrendered, and received back, in the exchange.
(d) Assumption of liability 

(1) In general 
Where, as part of the consideration to the taxpayer, another party to the exchange assumed a liability of the taxpayer, such assumption shall, for purposes of this section, be treated as money received by the taxpayer on the exchange.
(2) Exception 
Paragraph (1) shall not apply to the amount of any liability excluded under section 357 (c)(3).
(e) Exception 
This section shall not apply to property acquired by a corporation by the exchange of its stock or securities (or the stock or securities of a corporation which is in control of the acquiring corporation) as consideration in whole or in part for the transfer of the property to it.
(f) Definition of nonrecognition property in case of section 361 exchange 
For purposes of this section, the property permitted to be received under section 361 without the recognition of gain or loss shall be treated as consisting only of stock or securities in another corporation a party to the reorganization.
(g) Adjustments in intragroup transactions involving section 355 
In the case of a distribution to which section 355 (or so much of section 356 as relates to section 355) applies and which involves the distribution of stock from 1 member of an affiliated group (as defined in section 1504 (a) without regard to subsection (b) thereof) to another member of such group, the Secretary may, notwithstanding any other provision of this section, provide adjustments to the adjusted basis of any stock which
(1) is in a corporation which is a member of such group, and
(2) is held by another member of such group,

to appropriately reflect the proper treatment of such distribution.

(h) Special rules for assumption of liabilities to which subsection (d) does not apply 

(1) In general 
If, after application of the other provisions of this section to an exchange or series of exchanges, the basis of property to which subsection (a)(1) applies exceeds the fair market value of such property, then such basis shall be reduced (but not below such fair market value) by the amount (determined as of the date of the exchange) of any liability
(A) which is assumed by another person as part of the exchange, and
(B) with respect to which subsection (d)(1) does not apply to the assumption.
(2) Exceptions 
Except as provided by the Secretary, paragraph (1) shall not apply to any liability if
(A) the trade or business with which the liability is associated is transferred to the person assuming the liability as part of the exchange, or
(B) substantially all of the assets with which the liability is associated are transferred to the person assuming the liability as part of the exchange.
(3) Liability 
For purposes of this subsection, the term liability shall include any fixed or contingent obligation to make payment, without regard to whether the obligation is otherwise taken into account for purposes of this title.

Subpart C - Effects on Corporation

26 USC 361 - Nonrecognition of gain or loss to corporations; treatment of distributions

(a) General rule 
No gain or loss shall be recognized to a corporation if such corporation is a party to a reorganization and exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
(b) Exchanges not solely in kind 

(1) Gain 
If subsection (a) would apply to an exchange but for the fact that the property received in exchange consists not only of stock or securities permitted by subsection (a) to be received without the recognition of gain, but also of other property or money, then
(A) Property distributed 
If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but
(B) Property not distributed 
If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the corporation shall be recognized.

The amount of gain recognized under subparagraph (B) shall not exceed the sum of the money and the fair market value of the other property so received which is not so distributed.

(2) Loss 
If subsection (a) would apply to an exchange but for the fact that the property received in exchange consists not only of property permitted by subsection (a) to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.
(3) Treatment of transfers to creditors 
For purposes of paragraph (1), any transfer of the other property or money received in the exchange by the corporation to its creditors in connection with the reorganization shall be treated as a distribution in pursuance of the plan of reorganization. The Secretary may prescribe such regulations as may be necessary to prevent avoidance of tax through abuse of the preceding sentence or subsection (c)(3). In the case of a reorganization described in section 368 (a)(1)(D) with respect to which stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 355, this paragraph shall apply only to the extent that the sum of the money and the fair market value of other property transferred to such creditors does not exceed the adjusted bases of such assets transferred (reduced by the amount of the liabilities assumed (within the meaning of section 357 (c))).
(c) Treatment of distributions 

(1) In general 
Except as provided in paragraph (2), no gain or loss shall be recognized to a corporation a party to a reorganization on the distribution to its shareholders of property in pursuance of the plan of reorganization.
(2) Distributions of appreciated property 

(A) In general 
If
(i) in a distribution referred to in paragraph (1), the corporation distributes property other than qualified property, and
(ii) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation),

then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value.

(B) Qualified property 
For purposes of this subsection, the term qualified property means
(i) any stock in (or right to acquire stock in) the distributing corporation or obligation of the distributing corporation, or
(ii) any stock in (or right to acquire stock in) another corporation which is a party to the reorganization or obligation of another corporation which is such a party if such stock (or right) or obligation is received by the distributing corporation in the exchange.
(C) Treatment of liabilities 
If any property distributed in the distribution referred to in paragraph (1) is subject to a liability or the shareholder assumes a liability of the distributing corporation in connection with the distribution, then, for purposes of subparagraph (A), the fair market value of such property shall be treated as not less than the amount of such liability.
(3) Treatment of certain transfers to creditors 
For purposes of this subsection, any transfer of qualified property by the corporation to its creditors in connection with the reorganization shall be treated as a distribution to its shareholders pursuant to the plan of reorganization.
(4) Coordination with other provisions 
Section 311 and subpart B of part II of this subchapter shall not apply to any distribution referred to in paragraph (1).
(5) Cross reference 
For provision providing for recognition of gain in certain distributions, see section 355 (d).

26 USC 362 - Basis to corporations

(a) Property acquired by issuance of stock or as paid-in surplus 
If property was acquired on or after June 22, 1954, by a corporation
(1) in connection with a transaction to which section 351 (relating to transfer of property to corporation controlled by transferor) applies, or
(2) as paid-in surplus or as a contribution to capital,

then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer.

(b) Transfers to corporations 
If property was acquired by a corporation in connection with a reorganization to which this part applies, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer. This subsection shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the exchange of stock or securities of the transferee (or of a corporation which is in control of the transferee) as the consideration in whole or in part for the transfer.
(c) Special rule for certain contributions to capital 

(1) Property other than money 
Notwithstanding subsection (a)(2), if property other than money
(A) is acquired by a corporation, on or after June 22, 1954, as a contribution to capital, and
(B) is not contributed by a shareholder as such,

then the basis of such property shall be zero.

(2) Money 
Notwithstanding subsection (a)(2), if money
(A) is received by a corporation, on or after June 22, 1954, as a contribution to capital, and
(B) is not contributed by a shareholder as such,

then the basis of any property acquired with such money during the 12-month period beginning on the day the contribution is received shall be reduced by the amount of such contribution. The excess (if any) of the amount of such contribution over the amount of the reduction under the preceding sentence shall be applied to the reduction (as of the last day of the period specified in the preceding sentence) of the basis of any other property held by the taxpayer. The particular properties to which the reductions required by this paragraph shall be allocated shall be determined under regulations prescribed by the Secretary.

(d) Limitation on basis increase attributable to assumption of liability 

(1) In general 
In no event shall the basis of any property be increased under subsection (a) or (b) above the fair market value of such property (determined without regard to section 7701 (g)) by reason of any gain recognized to the transferor as a result of the assumption of a liability.
(2) Treatment of gain not subject to tax 
Except as provided in regulations, if
(A) gain is recognized to the transferor as a result of an assumption of a nonrecourse liability by a transferee which is also secured by assets not transferred to such transferee; and
(B) no person is subject to tax under this title on such gain,

then, for purposes of determining basis under subsections (a) and (b), the amount of gain recognized by the transferor as a result of the assumption of the liability shall be determined as if the liability assumed by the transferee equaled such transferees ratable portion of such liability determined on the basis of the relative fair market values (determined without regard to section 7701(g)) of all of the assets subject to such liability.

(e) Limitations on built-in losses 

(1) Limitation on importation of built-in losses 

(A) In general 
If in any transaction described in subsection (a) or (b) there would (but for this subsection) be an importation of a net built-in loss, the basis of each property described in subparagraph (B) which is acquired in such transaction shall (notwithstanding subsections (a) and (b)) be its fair market value immediately after such transaction.
(B) Property described 
For purposes of subparagraph (A), property is described in this subparagraph if
(i) gain or loss with respect to such property is not subject to tax under this subtitle in the hands of the transferor immediately before the transfer, and
(ii) gain or loss with respect to such property is subject to such tax in the hands of the transferee immediately after such transfer.

In any case in which the transferor is a partnership, the preceding sentence shall be applied by treating each partner in such partnership as holding such partners proportionate share of the property of such partnership.

(C) Importation of net built-in loss 
For purposes of subparagraph (A), there is an importation of a net built-in loss in a transaction if the transferees aggregate adjusted bases of property described in subparagraph (B) which is transferred in such transaction would (but for this paragraph) exceed the fair market value of such property immediately after such transaction.
(2) Limitation on transfer of built-in losses in section 351 transactions 

(A) In general 
If
(i) property is transferred by a transferor in any transaction which is described in subsection (a) and which is not described in paragraph (1) of this subsection, and
(ii) the transferees aggregate adjusted bases of such property so transferred would (but for this paragraph) exceed the fair market value of such property immediately after such transaction,

then, notwithstanding subsection (a), the transferees aggregate adjusted bases of the property so transferred shall not exceed the fair market value of such property immediately after such transaction.

(B) Allocation of basis reduction 
The aggregate reduction in basis by reason of subparagraph (A) shall be allocated among the property so transferred in proportion to their respective built-in losses immediately before the transaction.
(C) Election to apply limitation to transferor’s stock basis 

(i) In general If the transferor and transferee of a transaction described in subparagraph (A) both elect the application of this subparagraph
(I) subparagraph (A) shall not apply, and
(II) the transferors basis in the stock received for property to which subparagraph (A) does not apply by reason of the election shall not exceed its fair market value immediately after the transfer.
(ii) Election Any election under clause (i) shall be made at such time and in such form and manner as the Secretary may prescribe, and, once made, shall be irrevocable.

26 USC 363 - Repealed. Pub. L. 94455, title XIX, 1901(a)(49), Oct. 4, 1976, 90 Stat. 1773]

Section, act Aug. 16, 1954, ch. 736, 68A Stat. 119, related to cross reference for rules relating to effect on earnings and profits of transactions to which this part applies.

Subpart D - Special Rule; Definitions

26 USC 367 - Foreign corporations

(a) Transfers of property from the United States 

(1) General rule 
If, in connection with any exchange described in section 332, 351, 354, 356, or 361, a United States person transfers property to a foreign corporation, such foreign corporation shall not, for purposes of determining the extent to which gain shall be recognized on such transfer, be considered to be a corporation.
(2) Exception for certain stock or securities 
Except to the extent provided in regulations, paragraph (1) shall not apply to the transfer of stock or securities of a foreign corporation which is a party to the exchange or a party to the reorganization.
(3) Exception for transfers of certain property used in the active conduct of a trade or business 

(A) In general 
Except as provided in regulations prescribed by the Secretary, paragraph (1) shall not apply to any property transferred to a foreign corporation for use by such foreign corporation in the active conduct of a trade or business outside of the United States.
(B) Paragraph not to apply to certain property 
Except as provided in regulations prescribed by the Secretary, subparagraph (A) shall not apply to any
(i) property described in paragraph (1) or (3) of section 1221 (a) (relating to inventory and copyrights, etc.),
(ii) installment obligations, accounts receivable, or similar property,
(iii) foreign currency or other property denominated in foreign currency,
(iv) intangible property (within the meaning of section 936 (h)(3)(B)), or
(v) property with respect to which the transferor is a lessor at the time of the transfer, except that this clause shall not apply if the transferee was the lessee.
(C) Transfer of foreign branch with previously deducted losses 
Except as provided in regulations prescribed by the Secretary, subparagraph (A) shall not apply to gain realized on the transfer of the assets of a foreign branch of a United States person to a foreign corporation in an exchange described in paragraph (1) to the extent that
(i) the sum of losses
(I) which were incurred by the foreign branch before the transfer, and
(II) with respect to which a deduction was allowed to the taxpayer, exceeds
(ii) the sum of
(I) any taxable income of such branch for a taxable year after the taxable year in which the loss was incurred and through the close of the taxable year of the transfer, and
(II) the amount which is recognized under section 904 (f)(3) on account of the transfer.

Any gain recognized by reason of the preceding sentence shall be treated for purposes of this chapter as income from sources outside the United States having the same character as such losses had.

(4) Special rule for transfer of partnership interests 
Except as provided in regulations prescribed by the Secretary, a transfer by a United States person of an interest in a partnership to a foreign corporation in an exchange described in paragraph (1) shall, for purposes of this subsection, be treated as a transfer to such corporation of such persons pro rata share of the assets of the partnership.
(5) Paragraphs (2) and (3) not to apply to certain section 361 transactions 
Paragraphs (2) and (3) shall not apply in the case of an exchange described in subsection (a) or (b) of section 361. Subject to such basis adjustments and such other conditions as shall be provided in regulations, the preceding sentence shall not apply if the transferor corporation is controlled (within the meaning of section 368 (c)) by 5 or fewer domestic corporations. For purposes of the preceding sentence, all members of the same affiliated group (within the meaning of section 1504) shall be treated as 1 corporation.
(6) Secretary may exempt certain transactions from application of this subsection 
Paragraph (1) shall not apply to the transfer of any property which the Secretary, in order to carry out the purposes of this subsection, designates by regulation.
(b) Other transfers 

(1) Effect of section to be determined under regulations 
In the case of any exchange described in section 332, 351, 354, 355, 356, or 361 in connection with which there is no transfer of property described in subsection (a)(1), a foreign corporation shall be considered to be a corporation except to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent the avoidance of Federal income taxes.
(2) Regulations relating to sale or exchange of stock in foreign corporations 
The regulations prescribed pursuant to paragraph (1) shall include (but shall not be limited to) regulations dealing with the sale or exchange of stock or securities in a foreign corporation by a United States person, including regulations providing
(A) the circumstances under which
(i) gain shall be recognized currently, or amounts included in gross income currently as a dividend, or both, or
(ii) gain or other amounts may be deferred for inclusion in the gross income of a shareholder (or his successor in interest) at a later date, and
(B) the extent to which adjustments shall be made to earnings and profits, basis of stock or securities, and basis of assets.
(c) Transactions to be treated as exchanges 

(1) Section 355 distribution 
For purposes of this section, any distribution described in section 355 (or so much of section 356 as relates to section 355) shall be treated as an exchange whether or not it is an exchange.
(2) Contribution of capital to controlled corporations 
For purposes of this chapter, any transfer of property to a foreign corporation as a contribution to the capital of such corporation by one or more persons who, immediately after the transfer, own (within the meaning of section 318) stock possessing at least 80 percent of the total combined voting power of all classes of stock of such corporation entitled to vote shall be treated as an exchange of such property for stock of the foreign corporation equal in value to the fair market value of the property transferred.
(d) Special rules relating to transfers of intangibles 

(1) In general 
Except as provided in regulations prescribed by the Secretary, if a United States person transfers any intangible property (within the meaning of section 936 (h)(3)(B)) to a foreign corporation in an exchange described in section 351 or 361
(A) subsection (a) shall not apply to the transfer of such property, and
(B) the provisions of this subsection shall apply to such transfer.
(2) Transfer of intangibles treated as transfer pursuant to sale of contingent payments 

(A) In general 
If paragraph (1) applies to any transfer, the United States person transferring such property shall be treated as
(i) having sold such property in exchange for payments which are contingent upon the productivity, use, or disposition of such property, and
(ii) receiving amounts which reasonably reflect the amounts which would have been received
(I) annually in the form of such payments over the useful life of such property, or
(II) in the case of a disposition following such transfer (whether direct or indirect), at the time of the disposition.

The amounts taken into account under clause (ii) shall be commensurate with the income attributable to the intangible.

(B) Effect on earnings and profits 
For purposes of this chapter, the earnings and profits of a foreign corporation to which the intangible property was transferred shall be reduced by the amount required to be included in the income of the transferor of the intangible property under subparagraph (A)(ii).
(C) Amounts received treated as ordinary income 
For purposes of this chapter, any amount included in gross income by reason of this subsection shall be treated as ordinary income. For purposes of applying section 904 (d), any such amount shall be treated in the same manner as if such amount were a royalty.
(3) Regulations relating to transfers of intangibles to partnerships 
The Secretary may provide by regulations that the rules of paragraph (2) also apply to the transfer of intangible property by a United States person to a partnership in circumstances consistent with the purposes of this subsection.
(e) Treatment of distributions described in section 355 or liquidations under section 332 

(1) Distributions described in section 355 
In the case of any distribution described in section 355 (or so much of section 356 as relates to section 355) by a domestic corporation to a person who is not a United States person, to the extent provided in regulations, gain shall be recognized under principles similar to the principles of this section.
(2) Liquidations under section 332 
In the case of any liquidation to which section 332 applies, except as provided in regulations, subsections (a) and (b)(1) of section 337 shall not apply where the 80-percent distributee (as defined in section 337 (c)) is a foreign corporation.
(f) Other transfers 
To the extent provided in regulations, if a United States person transfers property to a foreign corporation as paid-in surplus or as a contribution to capital (in a transaction not otherwise described in this section), such transfer shall be treated as a sale or exchange for an amount equal to the fair market value of the property transferred, and the transferor shall recognize as gain the excess of
(1) the fair market value of the property so transferred, over
(2) the adjusted basis (for purposes of determining gain) of such property in the hands of the transferor.

26 USC 368 - Definitions relating to corporate reorganizations

(a) Reorganization 

(1) In general 
For purposes of parts I and II and this part, the term reorganization means
(A) a statutory merger or consolidation;
(B) the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition);
(C) the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the assumption by the acquiring corporation of a liability of the other shall be disregarded;
(D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356;
(E) a recapitalization;
(F) a mere change in identity, form, or place of organization of one corporation, however effected; or
(G) a transfer by a corporation of all or part of its assets to another corporation in a title 11 or similar case; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356.
(2) Special rules relating to paragraph (1) 

(A) Reorganizations described in both paragraph (1)(C) and paragraph (1)(D) 
If a transaction is described in both paragraph (1)(C) and paragraph (1)(D), then, for purposes of this subchapter (other than for purposes of subparagraph (C)), such transaction shall be treated as described only in paragraph (1)(D).
(B) Additional consideration in certain paragraph (1)(C) cases 
If
(i) one corporation acquires substantially all of the properties of another corporation,
(ii) the acquisition would qualify under paragraph (1)(C) but for the fact that the acquiring corporation exchanges money or other property in addition to voting stock, and
(iii) the acquiring corporation acquires, solely for voting stock described in paragraph (1)(C), property of the other corporation having a fair market value which is at least 80 percent of the fair market value of all of the property of the other corporation,

then such acquisition shall (subject to subparagraph (A) of this paragraph) be treated as qualifying under paragraph (1)(C). Solely for the purpose of determining whether clause (iii) of the preceding sentence applies, the amount of any liability assumed by the acquiring corporation shall be treated as money paid for the property.

(C) Transfers of assets or stock to subsidiaries in certain paragraph (1)(A), (1)(B), (1)(C), and (1)(G) cases 
A transaction otherwise qualifying under paragraph (1)(A), (1)(B), or (1)(C) shall not be disqualified by reason of the fact that part or all of the assets or stock which were acquired in the transaction are transferred to a corporation controlled by the corporation acquiring such assets or stock. A similar rule shall apply to a transaction otherwise qualifying under paragraph (1)(G) where the requirements of subparagraphs (A) and (B) of section 354 (b)(1) are met with respect to the acquisition of the assets.
(D) Use of stock of controlling corporation in paragraph (1)(A) and (1)(G) cases 
The acquisition by one corporation, in exchange for stock of a corporation (referred to in this subparagraph as controlling corporation) which is in control of the acquiring corporation, of substantially all of the properties of another corporation shall not disqualify a transaction under paragraph (1)(A) or (1)(G) if
(i) no stock of the acquiring corporation is used in the transaction, and
(ii) in the case of a transaction under paragraph (1)(A), such transaction would have qualified under paragraph (1)(A) had the merger been into the controlling corporation.
(E) Statutory merger using voting stock of corporation controlling merged corporation 
A transaction otherwise qualifying under paragraph (1)(A) shall not be disqualified by reason of the fact that stock of a corporation (referred to in this subparagraph as the controlling corporation) which before the merger was in control of the merged corporation is used in the transaction, if
(i) after the transaction, the corporation surviving the merger holds substantially all of its properties and of the properties of the merged corporation (other than stock of the controlling corporation distributed in the transaction); and
(ii) in the transaction, former shareholders of the surviving corporation exchanged, for an amount of voting stock of the controlling corporation, an amount of stock in the surviving corporation which constitutes control of such corporation.
(F) Certain transactions involving 2 or more investment companies 

(i) If immediately before a transaction described in paragraph (1) (other than subparagraph (E) thereof), 2 or more parties to the transaction were investment companies, then the transaction shall not be considered to be a reorganization with respect to any such investment company (and its shareholders and security holders) unless it was a regulated investment company, a real estate investment trust, or a corporation which meets the requirements of clause (ii).
(ii) A corporation meets the requirements of this clause if not more than 25 percent of the value of its total assets is invested in the stock and securities of any one issuer, and not more than 50 percent of the value of its total assets is invested in the stock and securities of 5 or fewer issuers. For purposes of this clause, all members of a controlled group of corporations (within the meaning of section 1563 (a)) shall be treated as one issuer. For purposes of this clause, a person holding stock in a regulated investment company, a real estate investment trust, or an investment company which meets the requirements of this clause shall, except as provided in regulations, be treated as holding its proportionate share of the assets held by such company or trust.
(iii) For purposes of this subparagraph the term investment company means a regulated investment company, a real estate investment trust, or a corporation 50 percent or more of the value of whose total assets are stock and securities and 80 percent or more of the value of whose total assets are assets held for investment. In making the 50-percent and 80-percent determinations under the preceding sentence, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiarys assets, and a corporation shall be considered a subsidiary if the parent owns 50 percent or more of the combined voting power of all classes of stock entitled to vote, or 50 percent or more of the total value of shares of all classes of stock outstanding.
(iv) For purposes of this subparagraph, in determining total assets there shall be excluded cash and cash items (including receivables). Government securities, and, under regulations prescribed by the Secretary, assets acquired (through incurring indebtedness or otherwise) for purposes of meeting the requirements of clause (ii) or ceasing to be an investment company.
(v) This subparagraph shall not apply if the stock of each investment company is owned substantially by the same persons in the same proportions.
(vi) If an investment company which does not meet the requirements of clause (ii) acquires assets of another corporation, clause (i) shall be applied to such investment company and its shareholders and security holders as though its assets had been acquired by such other corporation. If such investment company acquires stock of another corporation in a reorganization described in section 368 (a)(1)(B), clause (i) shall be applied to the shareholders of such investment company as though they had exchanged with such other corporation all of their stock in such company for stock having a fair market value equal to the fair market value of their stock of such investment company immediately after the exchange. For purposes of section 1001, the deemed acquisition or exchange referred to in the two preceding sentences shall be treated as a sale or exchange of property by the corporation and by the shareholders and security holders to which clause (i) is applied.
(vii) For purposes of clauses (ii) and (iii), the term securities includes obligations of State and local governments, commodity futures contracts, shares of regulated investment companies and real estate investment trusts, and other investments constituting a security within the meaning of the Investment Company Act of 1940 (15 U.S.C. 80a–2 (36)).[1]
[(viii) Repealed. Pub. L. 98–369, div. A, title I, 174(b)(5)(D), July 18, 1984, 98 Stat. 707]
(G) Distribution requirement for paragraph (1)(C) 

(i) In general A transaction shall fail to meet the requirements of paragraph (1)(C) unless the acquired corporation distributes the stock, securities, and other properties it receives, as well as its other properties, in pursuance of the plan of reorganization. For purposes of the preceding sentence, if the acquired corporation is liquidated pursuant to the plan of reorganization, any distribution to its creditors in connection with such liquidation shall be treated as pursuant to the plan of reorganization.
(ii) Exception The Secretary may waive the application of clause (i) to any transaction subject to any conditions the Secretary may prescribe.
(H) Special rules for determining whether certain transactions are qualified under paragraph (1)(D) 
For purposes of determining whether a transaction qualifies under paragraph (1)(D)
(i) in the case of a transaction with respect to which the requirements of subparagraphs (A) and (B) of section 354 (b)(1) are met, the term control has the meaning given such term by section 304 (c), and
(ii) in the case of a transaction with respect to which the requirements of section 355 (or so much of section 356 as relates to section 355) are met, the fact that the shareholders of the distributing corporation dispose of part or all of the distributed stock, or the fact that the corporation whose stock was distributed issues additional stock, shall not be taken into account.
(3) Additional rules relating to title 11 and similar cases 

(A) Title 11 or similar case defined 
For purposes of this part, the term title 11 or similar case means
(i) a case under title 11 of the United States Code, or
(ii) a receivership, foreclosure, or similar proceeding in a Federal or State court.
(B) Transfer of assets in a title 11 or similar case 
In applying paragraph (1)(G), a transfer of the assets of a corporation shall be treated as made in a title 11 or similar case if and only if
(i) any party to the reorganization is under the jurisdiction of the court in such case, and
(ii) the transfer is pursuant to a plan of reorganization approved by the court.
(C) Reorganizations qualifying under paragraph (1)(G) and another provision 
If a transaction would (but for this subparagraph) qualify both
(i) under subparagraph (G) of paragraph (1), and
(ii) under any other subparagraph of paragraph (1) or under section 332 or 351,

then, for purposes of this subchapter (other than section 357 (c)(1)), such transaction shall be treated as qualifying only under subparagraph (G) of paragraph (1).

(D) Agency receivership proceedings which involve financial institutions 
For purposes of subparagraphs (A) and (B), in the case of a receivership, foreclosure, or similar proceeding before a Federal or State agency involving a financial institution referred to in section 581 or 591, the agency shall be treated as a court.
(E) Application of paragraph (2)(E)(ii) 
In the case of a title 11 or similar case, the requirement of clause (ii) of paragraph (2)(E) shall be treated as met if
(i) no former shareholder of the surviving corporation received any consideration for his stock, and
(ii) the former creditors of the surviving corporation exchanged, for an amount of voting stock of the controlling corporation, debt of the surviving corporation which had a fair market value equal to 80 percent or more of the total fair market value of the debt of the surviving corporation.
(b) Party to a reorganization 
For purposes of this part, the term a party to a reorganization includes
(1) a corporation resulting from a reorganization, and
(2) both corporations, in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.

In the case of a reorganization qualifying under paragraph (1)(B) or (1)(C) of subsection (a), if the stock exchanged for the stock or properties is stock of a corporation which is in control of the acquiring corporation, the term a party to a reorganization includes the corporation so controlling the acquiring corporation. In the case of a reorganization qualifying under paragraph (1)(A), (1)(B), or (1)(C), or (1)(G) of subsection (a) by reason of paragraph (2)(C) of subsection (a), the term a party to a reorganization includes the corporation controlling the corporation to which the acquired assets or stock are transferred. In the case of a reorganization qualifying under paragraph (1)(A) or (1)(G) of subsection (a) by reason of paragraph (2)(D) of that subsection, the term a party to a reorganization includes the controlling corporation referred to in such paragraph (2)(D). In the case of a reorganization qualifying under subsection (a)(1)(A) by reason of subsection (a)(2)(E), the term party to a reorganization includes the controlling corporation referred to in subsection (a)(2)(E).

(c) Control defined 
For purposes of part I (other than section 304), part II, this part, and part V, the term control means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.
[1] So in original. A reference to 15 U.S.C. 80a–2 (a)(36) was probably intended.

[PART IV - REPEALED]

370 to 372. Repealed. Pub. L. 101508, title XI, 11801(a)(19), Nov. 5, 1990, 104 Stat. 1388521]

Section 370, added Pub. L. 96–589, § 4(f), Dec. 24, 1980, 94 Stat. 3404, related to termination of part. Section 371, acts Aug. 16, 1954, ch. 736, 68A Stat. 121; Oct. 4, 1976, Pub. L. 94–455, title XIX, § 1901(a)(50), 90 Stat. 1773, related to reorganization in certain receivership and bankruptcy proceedings. Section 372, acts Aug. 16, 1954, ch. 736, 68A Stat. 122; Sept. 2, 1958, Pub. L. 85–866, title I, § 95(a), 72 Stat. 1671; Oct. 4, 1976, Pub. L. 94–455, title XIX, §§ 1901(a)(51), (b)(14)(A), 1906 (b)(13)(A), 90 Stat. 1773, 1795, 1834, related to basis in connection with certain receivership and bankruptcy proceedings.

26 USC 373 - Repealed. Pub. L. 94455, title XIX, 1901(a)(52), Oct. 4, 1976, 90 Stat. 1773]

Section, acts Aug. 16, 1954, ch. 736, 68A Stat. 123; June 29, 1956, ch. 463, 3, 70 Stat. 403, related to loss not recognized in certain railroad reorganizations.

26 USC 374 - Repealed. Pub. L. 101508, title XI, 11801(a)(19), Nov. 5, 1990, 104 Stat. 1388521]

Section, added June 29, 1956, ch. 463, 1, 70 Stat. 402; amended Mar. 31, 1976, Pub. L. 94–253, § 1(a), (d), 90 Stat. 295, 296; Oct. 4, 1976, Pub. L. 94–455, title XIX, § 1901(a)(53), (b)(10)(A), (14)(B), (C), 90 Stat. 1773, 1795, 1796; Nov. 6, 1978, Pub. L. 95–600, title III, § 369(a), 92 Stat. 2857; Apr. 1, 1980, Pub. L. 96–222, title I, § 103(a)(14), 94 Stat. 214; Oct. 22, 1986, Pub. L. 99–514, title XVIII, § 1899A(9), 100 Stat. 2958, related to nonrecognition of gain or loss in certain railroad reorganizations.

TITLE 26 - US CODE - PART V - CARRYOVERS

26 USC 381 - Carryovers in certain corporate acquisitions

(a) General rule 
In the case of the acquisition of assets of a corporation by another corporation
(1) in a distribution to such other corporation to which section 332 (relating to liquidations of subsidiaries) applies; or
(2) in a transfer to which section 361 (relating to nonrecognition of gain or loss to corporations) applies, but only if the transfer is in connection with a reorganization described in subparagraph (A), (C), (D), (F), or (G) of section 368 (a)(1),

the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation, subject to the conditions and limitations specified in subsections (b) and (c). For purposes of the preceding sentence, a reorganization shall be treated as meeting the requirements of subparagraph (D) or (G) of section 368 (a)(1) only if the requirements of subparagraphs (A) and (B) of section 354 (b)(1) are met.

(b) Operating rules 
Except in the case of an acquisition in connection with a reorganization described in subparagraph (F) of section 368 (a)(1)
(1) The taxable year of the distributor or transferor corporation shall end on the date of distribution or transfer.
(2) For purposes of this section, the date of distribution or transfer shall be the day on which the distribution or transfer is completed; except that, under regulations prescribed by the Secretary, the date when substantially all of the property has been distributed or transferred may be used if the distributor or transferor corporation ceases all operations, other than liquidating activities, after such date.
(3) The corporation acquiring property in a distribution or transfer described in subsection (a) shall not be entitled to carry back a net operating loss or a net capital loss for a taxable year ending after the date of distribution or transfer to a taxable year of the distributor or transferor corporation.
(c) Items of the distributor or transferor corporation 
The items referred to in subsection (a) are:
(1) Net operating loss carryovers 
The net operating loss carryovers determined under section 172, subject to the following conditions and limitations:
(A) the taxable year of the acquiring corporation to which the net operating loss carryovers of the distributor or transferor corporation are first carried shall be the first taxable year ending after the date of distribution or transfer.
(B) In determining the net operating loss deduction, the portion of such deduction attributable to the net operating loss carryovers of the distributor or transferor corporation to the first taxable year of the acquiring corporation ending after the date of distribution or transfer shall be limited to an amount which bears the same ratio to the taxable income (determined without regard to a net operating loss deduction) of the acquiring corporation in such taxable year as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in the taxable year.
(C) For the purpose of determining the amount of the net operating loss carryovers under section 172 (b)(2), a net operating loss for a taxable year (hereinafter in this subparagraph referred to as the loss year) of a distributor or transferor corporation which ends on or before the end of a loss year of the acquiring corporation shall be considered to be a net operating loss for a year prior to such loss year of the acquiring corporation. For the same purpose, the taxable income for a prior taxable year (as the term is used in section 172 (b)(2)) shall be computed as provided in such section; except that, if the date of distribution or transfer is on a day other than the last day of a taxable year of the acquiring corporation
(i) such taxable year shall (for the purpose of this subparagraph only) be considered to be 2 taxable years (hereinafter in this subparagraph referred to as the pre-acquisition part year and the post-acquisition part year);
(ii) the pre-acquisition part year shall begin on the same day as such taxable year begins and shall end on the date of distribution or transfer;
(iii) the post-acquisition part year shall begin on the day following the date of distribution or transfer and shall end on the same day as the end of such taxable year;
(iv) the taxable income for such taxable year (computed with the modifications specified in section 172 (b)(2)(A) but without a net operating loss deduction) shall be divided between the pre-acquisition part year and the post-acquisition part year in proportion to the number of days in each;
(v) the net operating loss deduction for the pre-acquisition part year shall be determined as provided in section 172 (b)(2)(B), but without regard to a net operating loss year of the distributor or transferor corporation; and
(vi) the net operating loss deduction for the post-acquisition part year shall be determined as provided in section 172 (b)(2)(B).
(2) Earnings and profits 
In the case of a distribution or transfer described in subsection (a)
(A) the earnings and profits or deficit in earnings and profits, as the case may be, of the distributor or transferor corporation shall, subject to subparagraph (B), be deemed to have been received or incurred by the acquiring corporation as of the close of the date of the distribution or transfer; and
(B) a deficit in earnings and profits of the distributor, transferor, or acquiring corporation shall be used only to offset earnings and profits accumulated after the date of transfer. For this purpose, the earnings and profits for the taxable year of the acquiring corporation in which the distribution or transfer occurs shall be deemed to have been accumulated after such distribution or transfer in an amount which bears the same ratio to the undistributed earnings and profits of the acquiring corporation for such taxable year (computed without regard to any earnings and profits received from the distributor or transferor corporation, as described in subparagraph (A) of this paragraph) as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in the taxable year.
(3) Capital loss carryover 
The capital loss carryover determined under section 1212, subject to the following conditions and limitations:
(A) The taxable year of the acquiring corporation to which the capital loss carryover of the distributor or transferor corporation is first carried shall be the first taxable year ending after the date of distribution or transfer.
(B) The capital loss carryover shall be a short-term capital loss in the taxable year determined under subparagraph (A) but shall be limited to an amount which bears the same ratio to the capital gain net income (determined without regard to a short-term capital loss attributable to capital loss carryover), if any, of the acquiring corporation in such taxable year as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in the taxable year.
(C) For purposes of determining the amount of such capital loss carryover to taxable years following the taxable year determined under subparagraph (A), the capital gain net income in the taxable year determined under subparagraph (A) shall be considered to be an amount equal to the amount determined under subparagraph (B).
(4) Method of accounting 
The acquiring corporation shall use the method of accounting used by the distributor or transferor corporation on the date of distribution or transfer unless different methods were used by several distributor or transferor corporations or by a distributor or transferor corporation and the acquiring corporation. If different methods were used, the acquiring corporation shall use the method or combination of methods of computing taxable income adopted pursuant to regulations prescribed by the Secretary.
(5) Inventories 
In any case in which inventories are received by the acquiring corporation, such inventories shall be taken by such corporation (in determining its income) on the same basis on which such inventories were taken by the distributor or transferor corporation, unless different methods were used by several distributor or transferor corporations or by a distributor or transferor corporation and the acquiring corporation. If different methods were used, the acquiring corporation shall use the method or combination of methods of taking inventory adopted pursuant to regulations prescribed by the Secretary.
(6) Method of computing depreciation allowance 
The acquiring corporation shall be treated as the distributor or transferor corporation for purposes of computing the depreciation allowance under sections 167 and 168 on property acquired in a distribution or transfer with respect to so much of the basis in the hands of the acquiring corporation as does not exceed the adjusted basis in the hands of the distributor or transferor corporation.
[(7) Repealed. June 15, 1955, ch. 143, § 2(1), 69 Stat. 134] 
(8) Installment method 
If the acquiring corporation acquires installment obligations (the income from which the distributor or transferor corporation reports on the installment basis under section 453) the acquiring corporation shall, for purposes of section 453, be treated as if it were the distributor or transferor corporation.
(9) Amortization of bond discount or premium 
If the acquiring corporation assumes liability for bonds of the distributor or transferor corporation issued at a discount or premium, the acquiring corporation shall be treated as the distributor or transferor corporation after the date of distribution or transfer for purposes of determining the amount of amortization allowable or includible with respect to such discount or premium.
(10) Treatment of certain mining development and exploration expenses of distributor of transferor corporation 
The acquiring corporation shall be entitled to deduct, if it were the distributor or transferor corporation, expenses deferred under section 616 (relating to certain development expenditures) if the distributor or transferor corporation has so elected.
(11) Contributions to pension plans, employees’ annuity plans, and stock bonus and profit-sharing plans 
The acquiring corporation shall be considered to be the distributor or transferor corporation after the date of distribution or transfer for the purpose of determining the amounts deductible under section 404 with respect to pension plans, employees annuity plans, and stock bonus and profit-sharing plans.
(12) Recovery of tax benefit items 
If the acquiring corporation is entitled to the recovery of any amounts previously deducted by (or allowable as credits to) the distributor or transferor corporation, the acquiring corporation shall succeed to the treatment under section 111 which would apply to such amounts in the hands of the distributor or transferor corporation.
(13) Involuntary conversions under section 1033 
The acquiring corporation shall be treated as the distributor or transferor corporation after the date of distribution or transfer for purposes of applying section 1033.
(14) Dividend carryover to personal holding com­pany 
The dividend carryover (described in section 564) to taxable years ending after the date of distribution or transfer.
[(15) Repealed. Pub. L. 101–508, title XI, § 11801(c)(10)(A), Nov. 5, 1990, 104 Stat. 1388–526] 
(16) Certain obligations of distributor or transferor corporation 
If the acquiring corporation
(A) assumes an obligation of the distributor or transferor corporation which, after the date of the distribution or transfer, gives rise to a liability, and
(B) such liability, if paid or accrued by the distributor or transferor corporation, would have been deductible in computing its taxable income,

the acquiring corporation shall be entitled to deduct such items when paid or accrued, as the case may be, as if such corporation were the distributor or transferor corporation. A corporation which would have been an acquiring corporation under this section if the date of distribution or transfer had occurred on or after the effective date of the provisions of this subchapter applicable to a liquidation or reorganization, as the case may be, shall be entitled, even though the date of distribution or transfer occurred before such effective date, to apply this paragraph with respect to amounts paid or accrued in taxable years beginning after December 31, 1953, on account of such obligations of the distributor or transferor corporation. This paragraph shall not apply if such obligations are reflected in the amount of stock, securities, or property transferred by the acquiring corporation to the transferor corporation for the property of the transferor corporation.

(17) Deficiency dividend of personal holding company 
If the acquiring corporation pays a deficiency dividend (as defined in section 547 (d)) with respect to the distributor or transferor corporation, such distributor or transferor corporation shall, with respect to such payments, be entitled to the deficiency dividend deduction provided in section 547.
(18) Percentage depletion on extraction of ores or minerals from the waste or residue of prior mining 
The acquiring corporation shall be considered to be the distributor or transferor corporation for the purpose of determining the applicability of section 613 (c)(3) (relating to extraction of ores or minerals from the ground).
(19) Charitable contributions in excess of prior years’ limitation 
Contributions made in the taxable year ending on the date of distribution or transfer and the 4 prior taxable years by the distributor or transferor corporation in excess of the amount deductible under section 170 (b)(2) for such taxable years shall be deductible by the acquiring corporation for its taxable years which begin after the date of distribution or transfer, subject to the limitations imposed in section 170 (b)(2). In applying the preceding sentence, each taxable year of the distributor or transferor corporation beginning on or before the date of distribution or transfer shall be treated as a prior taxable year with reference to the acquiring corporations taxable years beginning after such date.
[(20) , (21) Repealed. Pub. L. 94–455, title XIX, § 1901(a)(54), (b)(16), Oct. 4, 1976, 90 Stat. 1773, 1796] 
(22) Successor insurance company 
If the acquiring corporation is an insurance company taxable under subchapter L, there shall be taken into account (to the extent proper to carry out the purposes of this section and of subchapter L, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of subchapter L in respect of the distributor or transferor corporation.
(23) Deficiency dividend of regulated investment company or real estate investment trust 
If the acquiring corporation pays a deficiency dividend (as defined in section 860 (f)) with respect to the distributor or transferor corporation, such distributor or transferor corporation shall, with respect to such payments, be entitled to the deficiency dividend deduction provided in section 860.
(24) Credit under section 38 
The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and section 38, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of section 38 in respect of the distributor or transferor corporation.
(25) Credit under section 53 
The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and section 53, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of section 53 in respect of the distributor or transferor corporation.
(26) Enterprise zone provisions 
The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and subchapter U, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of subchapter U in respect of the distributor or transferor corporation.
(d) Operations loss carrybacks and carryovers of life insurance companies 
For application of this part to operations loss carrybacks and carryovers of life insurance companies, see section 810.

26 USC 382 - Limitation on net operating loss carryforwards and certain built-in losses following ownership change

(a) General rule 
The amount of the taxable income of any new loss corporation for any post-change year which may be offset by pre-change losses shall not exceed the section 382 limitation for such year.
(b) Section 382 limitation 
For purposes of this section
(1) In general 
Except as otherwise provided in this section, the section 382 limitation for any post-change year is an amount equal to
(A) the value of the old loss corporation, multiplied by
(B) the long-term tax-exempt rate.
(2) Carryforward of unused limitation 
If the section 382 limitation for any post-change year exceeds the taxable income of the new loss corporation for such year which was offset by pre-change losses, the section 382 limitation for the next post-change year shall be increased by the amount of such excess.
(3) Special rule for post-change year which includes change date 
In the case of any post-change year which includes the change date
(A) Limitation does not apply to taxable income before change 
Subsection (a) shall not apply to the portion of the taxable income for such year which is allocable to the period in such year on or before the change date. Except as provided in subsection (h)(5) and in regulations, taxable income shall be allocated ratably to each day in the year.
(B) Limitation for period after change 
For purposes of applying the limitation of subsection (a) to the remainder of the taxable income for such year, the section 382 limitation shall be an amount which bears the same ratio to such limitation (determined without regard to this paragraph) as
(i) the number of days in such year after the change date, bears to
(ii) the total number of days in such year.
(c) Carryforwards disallowed if continuity of business requirements not met 

(1) In general 
Except as provided in paragraph (2), if the new loss corporation does not continue the business enterprise of the old loss corporation at all times during the 2-year period beginning on the change date, the section 382 limitation for any post-change year shall be zero.
(2) Exception for certain gains 
The section 382 limitation for any post-change year shall not be less than the sum of
(A) any increase in such limitation under
(i) subsection (h)(1)(A) for recognized built-in gains for such year, and
(ii) subsection (h)(1)(C) for gain recognized by reason of an election under section 338, plus
(B) any increase in such limitation under subsection (b)(2) for amounts described in subparagraph (A) which are carried forward to such year.
(d) Pre-change loss and post-change year 
For purposes of this section
(1) Pre-change loss 
The term pre-change loss means
(A) any net operating loss carryforward of the old loss corporation to the taxable year ending with the ownership change or in which the change date occurs, and
(B) the net operating loss of the old loss corporation for the taxable year in which the ownership change occurs to the extent such loss is allocable to the period in such year on or before the change date.

Except as provided in subsection (h)(5) and in regulations, the net operating loss shall, for purposes of subparagraph (B), be allocated ratably to each day in the year.

(2) Post-change year 
The term post-change year means any taxable year ending after the change date.
(e) Value of old loss corporation 
For purposes of this section
(1) In general 
Except as otherwise provided in this subsection, the value of the old loss corporation is the value of the stock of such corporation (including any stock described in section 1504 (a)(4)) immediately before the ownership change.
(2) Special rule in the case of redemption or other corporate contraction 
If a redemption or other corporate contraction occurs in connection with an ownership change, the value under paragraph (1) shall be determined after taking such redemption or other corporate contraction into account.
(3) Treatment of foreign corporations 
Except as otherwise provided in regulations, in determining the value of any old loss corporation which is a foreign corporation, there shall be taken into account only items treated as connected with the conduct of a trade or business in the United States.
(f) Long-term tax-exempt rate 
For purposes of this section
(1) In general 
The long-term tax-exempt rate shall be the highest of the adjusted Federal long-term rates in effect for any month in the 3-calendar-month period ending with the calendar month in which the change date occurs.
(2) Adjusted Federal long-term rate 
For purposes of paragraph (1), the term adjusted Federal long-term rate means the Federal long-term rate determined under section 1274 (d), except that
(A) paragraphs (2) and (3) thereof shall not apply, and
(B) such rate shall be properly adjusted for differences between rates on long-term taxable and tax-exempt obligations.
(g) Ownership change 
For purposes of this section
(1) In general 
There is an ownership change if, immediately after any owner shift involving a 5-percent shareholder or any equity structure shift
(A) the percentage of the stock of the loss corporation owned by 1 or more 5-percent shareholders has increased by more than 50 percentage points, over
(B) the lowest percentage of stock of the loss corporation (or any predecessor corporation) owned by such shareholders at any time during the testing period.
(2) Owner shift involving 5-percent shareholder 
There is an owner shift involving a 5-percent shareholder if
(A) there is any change in the respective ownership of stock of a corporation, and
(B) such change affects the percentage of stock of such corporation owned by any person who is a 5-percent shareholder before or after such change.
(3) Equity structure shift defined 

(A) In general 
The term equity structure shift means any reorganization (within the meaning of section 368). Such term shall not include
(i) any reorganization described in subparagraph (D) or (G) of section 368 (a)(1) unless the requirements of section 354 (b)(1) are met, and
(ii) any reorganization described in subparagraph (F) of section 368 (a)(1).
(B) Taxable reorganization-type transactions, etc. 
To the extent provided in regulations, the term equity structure shift includes taxable reorganization-type transactions, public offerings, and similar transactions.
(4) Special rules for application of subsection 

(A) Treatment of less than 5-percent shareholders 
Except as provided in subparagraphs (B)(i) and (C), in determining whether an ownership change has occurred, all stock owned by shareholders of a corporation who are not 5-percent shareholders of such corporation shall be treated as stock owned by 1 5-percent shareholder of such corporation.
(B) Coordination with equity structure shifts 
For purposes of determining whether an equity structure shift (or subsequent transaction) is an ownership change
(i) Less than 5-percent shareholders Subparagraph (A) shall be applied separately with respect to each group of shareholders (immediately before such equity structure shift) of each corporation which was a party to the reorganization involved in such equity structure shift.
(ii) Acquisitions of stock Unless a different proportion is established, acquisitions of stock after such equity structure shift shall be treated as being made proportionately from all shareholders immediately before such acquisition.
(C) Coordination with other owner shifts 
Except as provided in regulations, rules similar to the rules of subparagraph (B) shall apply in determining whether there has been an owner shift involving a 5-percent shareholder and whether such shift (or subsequent transaction) results in an ownership change.
(D) Treatment of worthless stock 
If any stock held by a 50-percent shareholder is treated by such shareholder as becoming worthless during any taxable year of such shareholder and such stock is held by such shareholder as of the close of such taxable year, for purposes of determining whether an ownership change occurs after the close of such taxable year, such shareholder
(i) shall be treated as having acquired such stock on the 1st day of his 1st succeeding taxable year, and
(ii) shall not be treated as having owned such stock during any prior period.

For purposes of the preceding sentence, the term 50-percent shareholder means any person owning 50 percent or more of the stock of the corporation at any time during the 3-year period ending on the last day of the taxable year with respect to which the stock was so treated.

(h) Special rules for built-in gains and losses and section 338 gains 
For purposes of this section
(1) In general 

(A) Net unrealized built-in gain 

(i) In general If the old loss corporation has a net unrealized built-in gain, the section 382 limitation for any recognition period taxable year shall be increased by the recognized built-in gains for such taxable year.
(ii) Limitation The increase under clause (i) for any recognition period taxable year shall not exceed
(I) the net unrealized built-in gain, reduced by
(II) recognized built-in gains for prior years ending in the recognition period.
(B) Net unrealized built-in loss 

(i) In general If the old loss corporation has a net unrealized built-in loss, the recognized built-in loss for any recognition period taxable year shall be subject to limitation under this section in the same manner as if such loss were a pre-change loss.
(ii) Limitation Clause (i) shall apply to recognized built-in losses for any recognition period taxable year only to the extent such losses do not exceed
(I) the net unrealized built-in loss, reduced by
(II) recognized built-in losses for prior taxable years ending in the recognition period.
(C) Special rules for certain section 338 gains 
If an election under section 338 is made in connection with an ownership change and the net unrealized built-in gain is zero by reason of paragraph (3)(B), then, with respect to such change, the section 382 limitation for the post-change year in which gain is recognized by reason of such election shall be increased by the lesser of
(i) the recognized built-in gains by reason of such election, or
(ii) the net unrealized built-in gain (determined without regard to paragraph (3)(B)).
(2) Recognized built-in gain and loss 

(A) Recognized built-in gain 
The term recognized built-in gain means any gain recognized during the recognition period on the disposition of any asset to the extent the new loss corporation establishes that
(i) such asset was held by the old loss corporation immediately before the change date, and
(ii) such gain does not exceed the excess of
(I) the fair market value of such asset on the change date, over
(II) the adjusted basis of such asset on such date.
(B) Recognized built-in loss 
The term recognized built-in loss means any loss recognized during the recognition period on the disposition of any asset except to the extent the new loss corporation establishes that
(i) such asset was not held by the old loss corporation immediately before the change date, or
(ii) such loss exceeds the excess of
(I) the adjusted basis of such asset on the change date, over
(II) the fair market value of such asset on such date.

Such term includes any amount allowable as depreciation, amortization, or depletion for any period within the recognition period except to the extent the new loss corporation establishes that the amount so allowable is not attributable to the excess described in clause (ii).

(3) Net unrealized built-in gain and loss defined 

(A) Net unrealized built-in gain and loss 

(i) In general The terms net unrealized built-in gain and net unrealized built-in loss mean, with respect to any old loss corporation, the amount by which
(I) the fair market value of the assets of such corporation immediately before an ownership change is more or less, respectively, than
(II) the aggregate adjusted basis of such assets at such time.
(ii) Special rule for redemptions or other corporate contractions If a redemption or other corporate contraction occurs in connection with an ownership change, to the extent provided in regulations, determinations under clause (i) shall be made after taking such redemption or other corporate contraction into account.
(B) Threshold requirement 

(i) In general If the amount of the net unrealized built-in gain or net unrealized built-in loss (determined without regard to this subparagraph) of any old loss corporation is not greater than the lesser of
(I) 15 percent of the amount determined for purposes of subparagraph (A)(i)(I), or
(II) $10,000,000,

the net unrealized built-in gain or net unrealized built-in loss shall be zero.

(ii) Cash and cash items not taken into account In computing any net unrealized built-in gain or net unrealized built-in loss under clause (i), except as provided in regulations, there shall not be taken into account
(I) any cash or cash item, or
(II) any marketable security which has a value which does not substantially differ from adjusted basis.
(4) Disallowed loss allowed as a carryforward 
If a deduction for any portion of a recognized built-in loss is disallowed for any post-change year, such portion
(A) shall be carried forward to subsequent taxable years under rules similar to the rules for the carrying forward of net operating losses (or to the extent the amount so disallowed is attributable to capital losses, under rules similar to the rules for the carrying forward of net capital losses), but
(B) shall be subject to limitation under this section in the same manner as a pre-change loss.
(5) Special rules for post-change year which includes change date 
For purposes of subsection (b)(3)
(A) in applying subparagraph (A) thereof, taxable income shall be computed without regard to recognized built-in gains to the extent such gains increased the section 382 limitation for the year (or recognized built-in losses to the extent such losses are treated as pre-change losses), and gain described in paragraph (1)(C), for the year, and
(B) in applying subparagraph (B) thereof, the section 382 limitation shall be computed without regard to recognized built-in gains, and gain described in paragraph (1)(C), for the year.
(6) Treatment of certain built-in items 

(A) Income items 
Any item of income which is properly taken into account during the recognition period but which is attributable to periods before the change date shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account.
(B) Deduction items 
Any amount which is allowable as a deduction during the recognition period (determined without regard to any carryover) but which is attributable to periods before the change date shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction.
(C) Adjustments 
The amount of the net unrealized built-in gain or loss shall be properly adjusted for amounts which would be treated as recognized built-in gains or losses under this paragraph if such amounts were properly taken into account (or allowable as a deduction) during the recognition period.
(7) Recognition period, etc. 

(A) Recognition period 
The term recognition period means, with respect to any ownership change, the 5-year period beginning on the change date.
(B) Recognition period taxable year 
The term recognition period taxable year means any taxable year any portion of which is in the recognition period.
(8) Determination of fair market value in certain cases 
If 80 percent or more in value of the stock of a corporation is acquired in 1 transaction (or in a series of related transactions during any 12-month period), for purposes of determining the net unrealized built-in loss, the fair market value of the assets of such corporation shall not exceed the grossed up amount paid for such stock properly adjusted for indebtedness of the corporation and other relevant items.
(9) Tax-free exchanges or transfers 
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection where property held on the change date was acquired (or is subsequently transferred) in a transaction where gain or loss is not recognized (in whole or in part).
(i) Testing period 
For purposes of this section
(1) 3-year period 
Except as otherwise provided in this section, the testing period is the 3-year period ending on the day of any owner shift involving a 5-percent shareholder or equity structure shift.
(2) Shorter period where there has been recent ownership change 
If there has been an ownership change under this section, the testing period for determining whether a 2nd ownership change has occurred shall not begin before the 1st day following the change date for such earlier ownership change.
(3) Shorter period where all losses arise after 3-year period begins 
The testing period shall not begin before the earlier of the 1st day of the 1st taxable year from which there is a carryforward of a loss or of an excess credit to the 1st post-change year or the taxable year in which the transaction being tested occurs. Except as provided in regulations, this paragraph shall not apply to any loss corporation which has a net unrealized built-in loss (determined after application of subsection (h)(3)(B)).
(j) Change date 
For purposes of this section, the change date is
(1) in the case where the last component of an ownership change is an owner shift involving a 5-percent shareholder, the date on which such shift occurs, and
(2) in the case where the last component of an ownership change is an equity structure shift, the date of the reorganization.
(k) Definitions and special rules 
For purposes of this section
(1) Loss corporation 
The term loss corporation means a corporation entitled to use a net operating loss carryover or having a net operating loss for the taxable year in which the ownership change occurs. Except to the extent provided in regulations, such term includes any corporation with a net unrealized built-in loss.
(2) Old loss corporation 
The term old loss corporation means any corporation
(A) with respect to which there is an ownership change, and
(B) which (before the ownership change) was a loss corporation.
(3) New loss corporation 
The term new loss corporation means a corporation which (after an ownership change) is a loss corporation. Nothing in this section shall be treated as implying that the same corporation may not be both the old loss corporation and the new loss corporation.
(4) Taxable income 
Taxable income shall be computed with the modifications set forth in section 172 (d).
(5) Value 
The term value means fair market value.
(6) Rules relating to stock 

(A) Preferred stock 
Except as provided in regulations and subsection (e), the term stock means stock other than stock described in section 1504 (a)(4).
(B) Treatment of certain rights, etc. 
The Secretary shall prescribe such regulations as may be necessary
(i) to treat warrants, options, contracts to acquire stock, convertible debt interests, and other similar interests as stock, and
(ii) to treat stock as not stock.
(C) Determinations on basis of value 
Determinations of the percentage of stock of any corporation held by any person shall be made on the basis of value.
(7) 5-percent shareholder 
The term 5-percent shareholder means any person holding 5 percent or more of the stock of the corporation at any time during the testing period.
(l) Certain additional operating rules 
For purposes of this section
(1) Certain capital contributions not taken into account 

(A) In general 
Any capital contribution received by an old loss corporation as part of a plan a principal purpose of which is to avoid or increase any limitation under this section shall not be taken into account for purposes of this section.
(B) Certain contributions treated as part of plan 
For purposes of subparagraph (A), any capital contribution made during the 2-year period ending on the change date shall, except as provided in regulations, be treated as part of a plan described in subparagraph (A).
(2) Ordering rules for application of section 

(A) Coordination with section 172 (b) carryover rules 
In the case of any pre-change loss for any taxable year (hereinafter in this subparagraph referred to as the loss year) subject to limitation under this section, for purposes of determining under the 2nd sentence of section 172 (b)(2) the amount of such loss which may be carried to any taxable year, taxable income for any taxable year shall be treated as not greater than
(i) the section 382 limitation for such taxable year, reduced by
(ii) the unused pre-change losses for taxable years preceding the loss year.

Similar rules shall apply in the case of any credit or loss subject to limitation under section 383.

(B) Ordering rule for losses carried from same taxable year 
In any case in which
(i) a pre-change loss of a loss corporation for any taxable year is subject to a section 382 limitation, and
(ii) a net operating loss of such corporation from such taxable year is not subject to such limitation,

taxable income shall be treated as having been offset first by the loss subject to such limitation.

(3) Operating rules relating to ownership of stock 

(A) Constructive ownership 
Section 318 (relating to constructive ownership of stock) shall apply in determining ownership of stock, except that
(i) paragraphs (1) and (5)(B) of section 318 (a) shall not apply and an individual and all members of his family described in paragraph (1) of section 318 (a) shall be treated as 1 individual for purposes of applying this section,
(ii) paragraph (2) of section 318 (a) shall be applied
(I) without regard to the 50-percent limitation contained in subparagraph (C) thereof, and
(II) except as provided in regulations, by treating stock attributed thereunder as no longer being held by the entity from which attributed,
(iii) paragraph (3) of section 318 (a) shall be applied only to the extent provided in regulations,
(iv) except to the extent provided in regulations, an option to acquire stock shall be treated as exercised if such exercise results in an ownership change, and
(v) in attributing stock from an entity under paragraph (2) of section 318 (a), there shall not be taken into account
(I) in the case of attribution from a corporation, stock which is not treated as stock for purposes of this section, or
(II) in the case of attribution from another entity, an interest in such entity similar to stock described in subclause (I).

A rule similar to the rule of clause (iv) shall apply in the case of any contingent purchase, warrant, convertible debt, put, stock subject to a risk of forfeiture, contract to acquire stock, or similar interests.

(B) Stock acquired by reason of death, gift, divorce, separation, etc. 
If
(i) the basis of any stock in the hands of any person is determined
(I) under section 1014 (relating to property acquired from a decedent),
(II) section 1015 (relating to property acquired by a gift or transfer in trust), or
(III) section 1041 (b)(2) (relating to transfers of property between spouses or incident to divorce),
(ii) stock is received by any person in satisfaction of a right to receive a pecuniary bequest, or
(iii) stock is acquired by a person pursuant to any divorce or separation instrument (within the meaning of section 71 (b)(2)),

such person shall be treated as owning such stock during the period such stock was owned by the person from whom it was acquired.

(C) Certain changes in percentage ownership which are attributable to fluctuations in value not taken into account 
Except as provided in regulations, any change in proportionate ownership which is attributable solely to fluctuations in the relative fair market values of different classes of stock shall not be taken into account.
(4) Reduction in value where substantial nonbusiness assets 

(A) In general 
If, immediately after an ownership change, the new loss corporation has substantial nonbusiness assets, the value of the old loss corporation shall be reduced by the excess (if any) of
(i) the fair market value of the nonbusiness assets of the old loss corporation, over
(ii) the nonbusiness asset share of indebtedness for which such corporation is liable.
(B) Corporation having substantial nonbusiness assets 
For purposes of subparagraph (A)
(i) In general The old loss corporation shall be treated as having substantial nonbusiness assets if at least 1/3 of the value of the total assets of such corporation consists of nonbusiness assets.
(ii) Exception for certain investment entities A regulated investment company to which part I of subchapter M applies, a real estate investment trust to which part II of subchapter M applies, or a REMIC to which part IV of subchapter M applies, shall not be treated as a new loss corporation having substantial nonbusiness assets.
(C) Nonbusiness assets 
For purposes of this paragraph, the term nonbusiness assets means assets held for investment.
(D) Nonbusiness asset share 
For purposes of this paragraph, the nonbusiness asset share of the indebtedness of the corporation is an amount which bears the same ratio to such indebtedness as
(i) the fair market value of the nonbusiness assets of the corporation, bears to
(ii) the fair market value of all assets of such corporation.
(E) Treatment of subsidiaries 
For purposes of this paragraph, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiarys assets. For purposes of the preceding sentence, a corporation shall be treated as a subsidiary if the parent owns 50 percent or more of the combined voting power of all classes of stock entitled to vote, and 50 percent or more of the total value of shares of all classes of stock.
(5) Title 11 or similar case 

(A) In general 
Subsection (a) shall not apply to any ownership change if
(i) the old loss corporation is (immediately before such ownership change) under the jurisdiction of the court in a title 11 or similar case, and
(ii) the shareholders and creditors of the old loss corporation (determined immediately before such ownership change) own (after such ownership change and as a result of being shareholders or creditors immediately before such change) stock of the new loss corporation (or stock of a controlling corporation if also in bankruptcy) which meets the requirements of section 1504 (a)(2) (determined by substituting 50 percent for 80 percent each place it appears).
(B) Reduction for interest payments to creditors becoming shareholders 
In any case to which subparagraph (A) applies, the pre-change losses and excess credits (within the meaning of section 383 (a)(2)) which may be carried to a post-change year shall be computed as if no deduction was allowable under this chapter for the interest paid or accrued by the old loss corporation on indebtedness which was converted into stock pursuant to title 11 or similar case during
(i) any taxable year ending during the 3-year period preceding the taxable year in which the ownership change occurs, and
(ii) the period of the taxable year in which the ownership change occurs on or before the change date.
(C) Coordination with section 108 
In applying section 108 (e)(8) to any case to which subparagraph (A) applies, there shall not be taken into account any indebtedness for interest described in subparagraph (B).
(D) Section 382 limitation zero if another change within 2 years 
If, during the 2-year period immediately following an ownership change to which this paragraph applies, an ownership change of the new loss corporation occurs, this paragraph shall not apply and the section 382 limitation with respect to the 2nd ownership change for any post-change year ending after the change date of the 2nd ownership change shall be zero.
(E) Only certain stock taken into account 
For purposes of subparagraph (A)(ii), stock transferred to a creditor shall be taken into account only to the extent such stock is transferred in satisfaction of indebtedness and only if such indebtedness
(i) was held by the creditor at least 18 months before the date of the filing of the title 11 or similar case, or
(ii) arose in the ordinary course of the trade or business of the old loss corporation and is held by the person who at all times held the beneficial interest in such indebtedness.
(F) Special rule for certain financial institutions 

(i) In general In the case of any ownership change to which this subparagraph applies, this paragraph shall be applied
(I) by substituting 1504(a)(2)(B) for 1504(a)(2) and 20 percent for 50 percent in subparagraph (A)(ii), and
(II) without regard to subparagraphs (B) and (C).
(ii) Special rule for depositors For purposes of applying this paragraph to an ownership change to which this subparagraph applies
(I) a depositor in the old loss corporation shall be treated as a stockholder in such loss corporation immediately before the change,
(II) deposits which, after the change, become deposits of the new loss corporation shall be treated as stock of the new loss corporation, and
(III) the fair market value of the outstanding stock of the new loss corporation shall include the amount of deposits in the new loss corporation immediately after the change.
(iii) Changes to which subparagraph applies This subparagraph shall apply to
(I) an equity structure shift which is a reorganization described in section 368 (a)(3)(D)(ii)1 (as modified by section 368 (a)(3)(D)(iv)),1 or
(II) any other equity structure shift (or transaction to which section 351 applies) which occurs as an integral part of a transaction involving a change to which subclause (I) applies.

This subparagraph shall not apply to any equity structure shift or transaction occurring on or after May 10, 1989.

(G) Title 11 or similar case 
For purposes of this paragraph, the term title 11 or similar case has the meaning given such term by section 368 (a)(3)(A).
(H) Election not to have paragraph apply 
A new loss corporation may elect, subject to such terms and conditions as the Secretary may prescribe, not to have the provisions of this paragraph apply.
(6) Special rule for insolvency transactions 
If paragraph (5) does not apply to any reorganization described in subparagraph (G) of section 368 (a)(1) or any exchange of debt for stock in a title 11 or similar case (as defined in section 368 (a)(3)(A)), the value under subsection (e) shall reflect the increase (if any) in value of the old loss corporation resulting from any surrender or cancellation of creditors claims in the transaction.
(7) Coordination with alternative minimum tax 
The Secretary shall by regulation provide for the application of this section to the alternative tax net operating loss deduction under section 56 (d).
(8) Predecessor and successor entities 
Except as provided in regulations, any entity and any predecessor or successor entities of such entity shall be treated as 1 entity.
(m) Regulations 
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section and section 383, including (but not limited to) regulations
(1) providing for the application of this section and section 383 where an ownership change with respect to the old loss corporation is followed by an ownership change with respect to the new loss corporation, and
(2) providing for the application of this section and section 383 in the case of a short taxable year,
(3) providing for such adjustments to the application of this section and section 383 as is necessary to prevent the avoidance of the purposes of this section and section 383, including the avoidance of such purposes through the use of related persons, pass-thru entities, or other intermediaries,
(4) providing for the application of subsection (g)(4) where there is only 1 corporation involved, and
(5) providing, in the case of any group of corporations described in section 1563 (a) (determined by substituting 50 percent for 80 percent each place it appears and determined without regard to paragraph (4) thereof), appropriate adjustments to value, built-in gain or loss, and other items so that items are not omitted or taken into account more than once.
[1] See References in Text note below.

26 USC 383 - Special limitations on certain excess credits, etc.

(a) Excess credits 

(1) In general 
Under regulations, if an ownership change occurs with respect to a corporation, the amount of any excess credit for any taxable year which may be used in any post-change year shall be limited to an amount determined on the basis of the tax liability which is attributable to so much of the taxable income as does not exceed the section 382 limitation for such post-change year to the extent available after the application of section 382 and subsections (b) and (c) of this section.
(2) Excess credit 
For purposes of paragraph (1), the term excess credit means
(A) any unused general business credit of the corporation under section 39, and
(B) any unused minimum tax credit of the corporation under section 53.
(b) Limitation on net capital loss 
If an ownership change occurs with respect to a corporation, the amount of any net capital loss under section 1212 for any taxable year before the 1st post-change year which may be used in any post-change year shall be limited under regulations which shall be based on the principles applicable under section 382. Such regulations shall provide that any such net capital loss used in a post-change year shall reduce the section 382 limitation which is applied to pre-change losses under section 382 for such year.
(c) Foreign tax credits 
If an ownership change occurs with respect to a corporation, the amount of any excess foreign taxes under section 904 (c) for any taxable year before the 1st post-change taxable year shall be limited under regulations which shall be consistent with purposes of this section and section 382.
(d) Pro ration rules for year which includes change 
For purposes of this section, rules similar to the rules of subsections (b)(3) and (d)(1)(B) of section 382 shall apply.
(e) Definitions 
Terms used in this section shall have the same respective meanings as when used in section 382, except that appropriate adjustments shall be made to take into account that the limitations of this section apply to credits and net capital losses.

26 USC 384 - Limitation on use of preacquisition losses to offset built-in gains

(a) General rule 
If
(1) 
(A) a corporation acquires directly (or through 1 or more other corporations) control of another corporation, or
(B) the assets of a corporation are acquired by another corporation in a reorganization described in subparagraph (A), (C), or (D) of section 368 (a)(1), and
(2) either of such corporations is a gain corporation,

income for any recognition period taxable year (to the extent attributable to recognized built-in gains) shall not be offset by any preacquisition loss (other than a preacquisition loss of the gain corporation).

(b) Exception where corporations under common control 

(1) In general 
Subsection (a) shall not apply to the preacquisition loss of any corporation if such corporation and the gain corporation were members of the same controlled group at all times during the 5-year period ending on the acquisition date.
(2) Controlled group 
For purposes of this subsection, the term controlled group means a controlled group of corporations (as defined in section 1563 (a)); except that
(A) more than 50 percent shall be substituted for at least 80 percent each place it appears,
(B) the ownership requirements of section 1563 (a) must be met both with respect to voting power and value, and
(C) the determination shall be made without regard to subsection (a)(4) of section 1563.
(3) Shorter period where corporations not in existence for 5 years 
If either of the corporations referred to in paragraph (1) was not in existence throughout the 5-year period referred to in paragraph (1), the period during which such corporation was in existence (or if both, the shorter of such periods) shall be substituted for such 5-year period.
(c) Definitions 
For purposes of this section
(1) Recognized built-in gain 

(A) In general 
The term recognized built-in gain means any gain recognized during the recognition period on the disposition of any asset except to the extent the gain corporation (or, in any case described in subsection (a)(1)(B), the acquiring corporation) establishes that
(i) such asset was not held by the gain corporation on the acquisition date, or
(ii) such gain exceeds the excess (if any) of
(I) the fair market value of such asset on the acquisition date, over
(II) the adjusted basis of such asset on such date.
(B) Treatment of certain income items 
Any item of income which is properly taken into account for any recognition period taxable year but which is attributable to periods before the acquisition date shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account and shall be taken into account in determining the amount of the net unrealized built-in gain.
(C) Limitation 
The amount of the recognized built-in gains for any recognition period taxable year shall not exceed
(i) the net unrealized built-in gain, reduced by
(ii) the recognized built-in gains for prior years ending in the recognition period which (but for this section) would have been offset by preacquisition losses.
(2) Acquisition date 
The term acquisition date means
(A) in any case described in subsection (a)(1)(A), the date on which the acquisition of control occurs, or
(B) in any case described in subsection (a)(1)(B), the date of the transfer in the reorganization.
(3) Preacquisition loss 

(A) In general 
The term preacquisition loss means
(i) any net operating loss carryforward to the taxable year in which the acquisition date occurs, and
(ii) any net operating loss for the taxable year in which the acquisition date occurs to the extent such loss is allocable to the period in such year on or before the acquisition date.

Except as provided in regulations, the net operating loss shall, for purposes of clause (ii), be allocated ratably to each day in the year.

(B) Treatment of recognized built-in loss 
In the case of a corporation with a net unrealized built-in loss, the term preacquisition loss includes any recognized built-in loss.
(4) Gain corporation 
The term gain corporation means any corporation with a net unrealized built-in gain.
(5) Control 
The term control means ownership of stock in a corporation which meets the requirements of section 1504 (a)(2).
(6) Treatment of members of same group 
Except as provided in regulations and except for purposes of subsection (b), all corporations which are members of the same affiliated group immediately before the acquisition date shall be treated as 1 corporation. To the extent provided in regulations, section 1504 shall be applied without regard to subsection (b) thereof for purposes of the preceding sentence.
(7) Treatment of predecessors and successors 
Any reference in this section to a corporation shall include a reference to any predecessor or successor thereof.
(8) Other definitions 
Except as provided in regulations, the terms net unrealized built-in gain, net unrealized built-in loss, recognized built-in loss, recognition period, and recognition period taxable year, have the same respective meanings as when used in section 382 (h), except that the acquisition date shall be taken into account in lieu of the change date.
(d) Limitation also to apply to excess credits or net capital losses 
Rules similar to the rules of subsection (a) shall also apply in the case of any excess credit (as defined in section 383 (a)(2)) or net capital loss.
(e) Ordering rules for net operating losses, etc. 

(1) Carryover rules 
If any preacquisition loss may not offset a recognized built-in gain by reason of this section, such gain shall not be taken into account in determining under section 172 (b)(2) the amount of such loss which may be carried to other taxable years. A similar rule shall apply in the case of any excess credit or net capital loss limited by reason of subsection (d).
(2) Ordering rule for losses carried from same taxable year 
In any case in which
(A) a preacquisition loss for any taxable year is subject to limitation under subsection (a), and
(B) a net operating loss from such taxable year is not subject to such limitation,

taxable income shall be treated as having been offset 1st by the loss subject to such limitation.

(f) Regulations 
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to ensure that the purposes of this section may not be circumvented through
(1) the use of any provision of law or regulations (including subchapter K of this chapter), or
(2) contributions of property to a corporation.

TITLE 26 - US CODE - PART VI - TREATMENT OF CERTAIN CORPORATE INTERESTS AS STOCK OR INDEBTEDNESS

26 USC 385 - Treatment of certain interests in corporations as stock or indebtedness

(a) Authority to prescribe regulations 
The Secretary is authorized to prescribe such regulations as may be necessary or appropriate to determine whether an interest in a corporation is to be treated for purposes of this title as stock or indebtedness (or as in part stock and in part indebtedness).
(b) Factors 
The regulations prescribed under this section shall set forth factors which are to be taken into account in determining with respect to a particular factual situation whether a debtor-creditor relationship exists or a corporation-shareholder relationship exists. The factors so set forth in the regulations may include among other factors:
(1) whether there is a written unconditional promise to pay on demand or on a specified date a sum certain in money in return for an adequate consideration in money or moneys worth, and to pay a fixed rate of interest,
(2) whether there is subordination to or preference over any indebtedness of the corporation,
(3) the ratio of debt to equity of the corporation,
(4) whether there is convertibility into the stock of the corporation, and
(5) the relationship between holdings of stock in the corporation and holdings of the interest in question.
(c) Effect of classification by issuer 

(1) In general 
The characterization (as of the time of issuance) by the issuer as to whether an interest in a corporation is stock or indebtedness shall be binding on such issuer and on all holders of such interest (but shall not be binding on the Secretary).
(2) Notification of inconsistent treatment 
Except as provided in regulations, paragraph (1) shall not apply to any holder of an interest if such holder on his return discloses that he is treating such interest in a manner inconsistent with the characterization referred to in paragraph (1).
(3) Regulations 
The Secretary is authorized to require such information as the Secretary determines to be necessary to carry out the provisions of this subsection.

[PART VII - REPEALED]

26 USC 386 - Repealed. Pub. L. 100647, title I, 1006(e)(8)(A), Nov. 10, 1988, 102 Stat. 3401]

Section, added Pub. L. 98–369, div. A, title I, 75(a), July 18, 1984, 98 Stat. 594; amended Pub. L. 99–514, title XVIII, § 1805(c)(1), Oct. 22, 1986, 100 Stat. 2810, related to transfers of partnership and trust interests by corporations.

391 to 395. Repealed. Pub. L. 94455, title XIX, 1901(a)(55), Oct. 4, 1976, 90 Stat. 1773]

Section 391, acts Aug. 16, 1954, ch. 736, 68A Stat. 131; Sept. 2, 1958, Pub. L. 85–866, title I, § 22(a), 72 Stat. 1620, related to effective date of section 301 et seq. of this title. Section 392, act Aug. 16, 1954, ch. 736, 68A Stat. 131, related to effective date of section 331 et seq. of this title. Section 393, act Aug. 16, 1954, ch. 736, 68A Stat. 132, related to effective date of section 351 et seq. of this title. Section 394, act Aug. 16, 1954, ch. 736, 68A Stat. 133, related to effective date of section 381 et seq. of this title. Section 395, act Aug. 16, 1954, ch. 736, 68A Stat. 133, related to special rules for application of this subchapter.