Sec

Sec. 355. Distribution of stock and securities of a controlled

        corporation

    (a) Effect on distributes

Sections 355(a), (c)(1) Ex. 2, 368(a)(1)(D) Ex. 1, 312(h), 358(c) Ex. 2, 361(c) Ex. 1

Assumptions: X has conducted both Widget and Cog businesses directly for 25 years. The transaction was not used principally as a device for the distribution of earnings and profits.

Treatment: The transaction qualifies as a divisive D reorganization pursuant to § §355 and 368(a)(1)(D). X recognizes none of its realized gain of 50 in its exchange with Newco. §361(b). Newco recognizes no gain or loss on the distribution of Newco stock to A. §361(c). A recognizes no gain or loss on the receipt of the Newco stock. §355(a). A's basis in X and Newco will be 60 each based on their respective FMVs. §§358(a)(1), and (c) and Reg. §§1.358-2(a)(1) and (2). E&P is likewise allocated 60/60 based on relative FMVs. §312(h). The entire NOL stays with X. Newco will AB of 50 in the Cog assets. §362(b). N.b., §355(c) does not apply because the transaction is a reorganization.

      (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,

Sections 355(a)(1)(A), 356(b) Ex. 1

Assumptions: P and S have conducted their businesses for more than 5 years.

Treatment: §355 does not apply to P's distribution to A because the distribution was not solely stock of a controlled corporation (here, S) with respect to A's P stock, or securities for securities. §355(a)(1)(A). The distribution also included other property, cash. But, the transaction would have (presumably) qualified under §355 but for the receipt of this boot. The distribution (which does not involve an exchange) therefore qualifies under §356(b). As a result, A is deemed to receive a §301 distribution equal to the boot received, 10. §356(b). Because P has sufficient E&P, A's distribution is treated as a dividend. §301(c)(1). The remainder of A's realized gain is not recognized. A's basis in P and S will become 48 and 32, respectively, based on the relative FMVs of P (150) and S (100) after 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),

Section 355(a)(1)(B) Ex. 1

Assumptions: P's drop-down of cash to S2 is quickly followed by P's distribution of the S2 stock to A and B, which is quickly followed by their sale of the S2 stock to the third party.

Treatment: The totality of the circumstances strongly suggest that the transaction was a device for the distribution of E&P. As such, the transaction would not qualify for §355 tax-free treatment. The distribution would instead be treated as taxable.

Section 355(a)(1)(B) Ex. 2

Assumptions: P and S2 have each actively conducted their businesses for more than 5 years. Shortly after P's distribution of the S2 stock, an unexpected death occurs in B's family which compels B to sell B's S2 stock to raise necessary cash.

Treatment: The mere sale of S2 stock by B should not be construed to treat the transaction as a device. §355(a)(1)(B). The sale did not appear to occur as a result of an arrangement or negotiations that occurred prior to P's distribution of S2. The totality of the facts as presented do not suggest that the transaction was a device for the distribution of E&P. And, since the facts suggest do not suggest that any other requirements have not been satisfied, §355 should apply, conferring tax-free treatment to the distribution.

Section 355(a)(1)(B) Ex. 3

Assumptions: P and S2 have each actively conducted their businesses for more than 5 years. Shortly after P's distribution of the S2 stock, A and B sell all of their S2 stock to a third party pursuant to an arrangement that was a fait accompli as of the time of P's distribution of S2.

Treatment: The mere fact that stock of the distributing corporation or, as is the case here, the controlled corporation, is sold after the distribution should not normally be construed to indicate the presence of a device. But where, as is true here, the stock sale occurs as a result of an arrangement negotiated or agreed upon prior to the distribution, there is a very strong possibility that a device does exist. As such, the transaction would not be tax-free pursuant to §355.

          (C) the requirements of subsection (b) (relating to active

        businesses) are satisfied, and

Sections 355(a)(1)(C) Ex. 1, (b)(1)(A) Ex. 1, (c)(1) Ex. 1, (c)(2)(B) Ex. 1, (c)(3) Ex. 1

Assumptions: P and S have each owned and operated the Widget and Cog businesses, respectively, for more than 5 years.

Treatment: §355(a)(1)(C) is satisfied by virtue of satisfying §355(b)(1)(A). Both the distributing corporation, P, and the controlled corporation, S, are engaged in the active conduct of a trade or business immediately after the distribution . §355(b)(1)(A) is designed for spin-offs (as is the case here) and split-offs.

As a result of §355(a) applying (without a D reorganization), §355(c) applies, resulting in no gain or loss recognized by P. The stock of S, while appreciated, is qualified property (§355(c)(2)(B)), resulting in no gain recognized on its distribution. §311 does not apply. §355(c)(3).

Sections 355(a)(1)(C) Ex. 2, (b)(1)(A) Ex. 2

Assumptions: P, S1 and S2 have each owned and conducted their respective businesses for more than 5 years.

Treatment: §355(a)(1)(C) is satisfied by virtue of satisfying §355(b)(1)(A). The distributing corporation, P, and each controlled corporation (i.e., each corporation that is both controlled and distributed), S1 and S2, are all engaged in the active conduct of a trade or business immediately after the distribution.

Sections 355(a)(1)(C) Ex. 3, (b)(1)(B) Ex. 1, (c)(1) Ex. 4, (c)(3) Ex. 2

Assumptions: S and T have each owned and conducted their respective business for more than 5 years.

Treatment: §355(a)(1)(C) is satisfied by virtue of satisfying §355(b)(1)(B). Immediately before the distribution, the distributing corporation, P, had no assets other than stock in the controlled (and distributed) corporations T and S, and each of T and S engage in the active conduct of a business after the distribution. §355(b)(1)(B) is designed for split-ups, as is the case here.

As a result of §355 applying, §336 does not apply and P does not recognize gain or loss on the liquidation. §§355(c)(1) & (3).

Sections 355(a)(1)(C) Ex. 4, (b)(1) Ex. 3, (b)(2)(A) Ex. 1, (b)(3) Ex. 1

Assumptions: P has no assets other than the controlling stock interests in S1, S2 and S3. S2 and S3 have each owned and conducted their respective businesses for more than 5 years.

Treatment: The requirements of §355(b)(1) are satisfied and, therefore, §355(a)(1)(C) is satisfied and, therefore, the distribution of S3 is tax-free under §355. §355(b)(1)(A) requires both the controlled corporation, S3, and the distributing corporation, P, to be engaged in the active conduct of a business. S3 is engaged in the active conduct of a business. P is not directly engaged in the active conduct of a business. P is also not engaged in the active conduct of a business by virtue of substantially all of its assets consisting of stock or securities of a corporation controlled by P which is so engaged in the active conduct - S1 is not engaged in the active conduct of a business. §355(b)(2)(A) is nonetheless satisfied by virtue of §355(b)(3). P, S1 and S2 form a "separate affiliated group" as defined in §355(b)(3)(B), and that separate affiliated group is engaged in the active conduct of the Widget business.

Sections 355(a)(1)(C) Ex. 5, (b)(2)(A) Ex. 2, (b)(3) Ex. 2

Assumptions: P and S2 have both conducted their respective businesses for more than 5 years. S1 does not directly conduct a trade or business.

Treatment: The requirements of §355(a)(1)(C) are satisfied by virtue of satisfying §355(b)(2)(A). P is directly engaged in the active conduct of the Widget business. While S1, the controlled corporation, does not directly conduct a trade or business, it satisfies the §355(b)(2)(A) requirements by virtue of §355(b)(3)(B). S1 is the common parent of a separate affiliated group that includes S1 and S2. That separate affiliated group conducts the Cog business and, therefore, the common parent of that group, S1, is deemed to conduct that business. Hence, S1 satisfies the requirements of §355(b)(2)(A).

          (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.

Section 355(a)(1)(D)

Assumptions: P, S1, S2, and S3 have all conducted their respective businesses for more than 5 years. P retained 5% of the outstanding stock of S3 in order to satisfy a claim by an executive of S3 pursuant to a stock option granted to that executive.

Treatment: The distributions of S2 and S3 satisfy the requirements of §355(a)(1)(D), but the distribution of S1 does not. P did not have a controlling interest in S1 and, therefore, its distribution by P cannot qualify. The distribution of S2 qualifies because P's ownership in S2 is a controlling interest and P distributes all it owns in S2. §355(a)(1)(D)(i). The distribution of S3 qualifies because P owns and distributes a controlling interest (i.e., at least 80%) and the S3 stock retained by P was not retained for tax avoidance purposes. §355(a)(1)(D)(ii).

      (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)).

Sections 355(a)(2), 368(a)(1)(D) Ex. 2

Assumptions: P and S1 have conducted their businesses for more than 5 years. P distributed S1 pro-rata. P exchanged Newco with C for 10 P shares.

Treatment: P's distributions of S1 and Newco can both qualify for §355 treatment. P's distribution of S1 qualifies even though the shareholders did not surrender stock in exchange. §355(a)(2)(B). §355 treatment applies whether the stock is received pro-rata (as is the case with P C's exchange of Newco stock for P stock). §355(a)(2)(A). §355 treatment applies whether the transaction is a D reorganization (as is the case with Newco) or not (as is the case with S1). §355(a)(2)(C). P's exchange of Widget assets for Newco stock is a D reorganization because P has transferred part of its assets and immediately afterwards one of its shareholders, C, owns a controlling interest in Newco, and the transaction qualifies under §355.

      (3) Limitations

Sections 355(a)(3), (a)(4) Ex. 2, 356(a)(1) Ex. 4, (d)(1) Ex. 2, (d)(2)(A) Ex. 2, (d)(2)(C)

Assumptions: X and S have each conducted their respective businesses for more than 5 years. The transaction is not used principally as a device for the distribution of E&P. The X bond exchanged by A has a principal amount of 10 while the S bond received has a principal amount of 15.

Treatment: §355 would have applied to the transaction but for the receipt of boot by A. §356 therefore applies. A has a realized gain of 14, AR of 64 (50 + 14) less AB of 50 (40 + 10). A will recognize the realized gain to the extent of the FMV of boot received. §356(a)(1). The S bond received is a security. While a security received is generally treated as boot, §356(d)(1), securities received are not treated as boot to the extent those securities would be permitted to be received under §§354 or 355 without recognition of gain. §356(d)(2). A would be permitted to receive S securities up to the principal amount of 10 which is the principal amount of X securities surrendered by A. §§355(a)(1) & (3)(A). The excess principal amount of securities received by A is therefore 5 (15 - 10). But only the FMV of this excess principal amount is considered boot. §356(d)(2)(C). The FMV of this excess principal amount equals 4.67 (14/15 x 5). See, e.g., Reg. §1.356-3(c) Ex. 2. A therefore recognizes gain of 4.67 (which is less than the realized gain of 14).

        (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.

Sections 355(a)(3)(B) Ex. 1, (a)(4)Ex. 1, 356(a)(1) Ex. 3

Assumptions: P has owned 90% of S for more than 5 years. 3 years ago P purchased the remaining 10% of S from a third party. P and S have conducted their respective businesses for more than 5 years.

P exchanges all of its S stock with shareholder B in exchange for all 50 P shares owned by B. The transaction is not used principally as a device for the distribution of E&P.

Treatment: The exchange between P and B would qualify for §355 treatment but for the transfer by P of boot which here includes land, cash and 10 shares of S stock. 10 shares of S stock are boot because those shares were acquired in a recognition transaction within the last 5 years. §355(a)(3)(B). The remaining 90 shares would qualify as non-recognition property. Accordingly, §356(a)(1) applies to the exchange, and of A's realized gain of 40 (amount realized of 90 (60 + 20 + 10) less AB of 50), only 36 is recognized - i.e., not in excess of the amount of cash (10) plus the FMV of other property received (land, FMV 20 + 10 shares S, FMV 6). §355(a)(4)(A).

Sections 355(a)(3)(B) Ex. 2, (b)(2)(D)(i) Ex. 1

Assumptions: X, previously a holding company, has owned S, S has conducted the Cog business, and Z has conducted the widget business for more than 5 years. P and Y purchased Z (i.e., the Z stock) for cash from a third party 4 years ago. 3 years ago, P and Y transferred their Z stock to X n a §351 transaction in which A and B transferred needed cash, for additional stock. Z liquidated last year, transferring its Widget business to X.

Treatment: The stock of Z would not be considered boot under §355(a)(3)(B) in the hands of X because, while X acquired the Z stock within the last 5 years, the acquisition was not a taxable transaction. And, S is engaged in the active conduct of a business, satisfying §355(b)(2). But, X does not satisfy §355(b)(2). While X actively conducts a business (§355(b)(2)(A)) and such business has been actively conducted for 5 years (§355(b)(2)(B)), and the business was not acquired in a recognition transaction (§355(b)(2)(C) by virtue of §332), control of a corporation, Z, which conducted the Widget business was acquired within the last 5 years in a recognition transaction by a distributee corporation. §355(b)(2)(D)(i). For this purpose, P and Y, members of the same affiliated group, are treated as one distributee. §355(b)(2)(D). Hence, §355(b)(2)(D) is not satisfied, and the spin off is not tax-free under §355, and hence, P and Y's acquisition of a majority interest in S is a taxable event to Y.

Sections 355(a)(3)(B) Ex. 3, (D)

Assumptions: X and S have operated their respective businesses for more than 5 years. The distribution is assumed to not be principally used as a device for the distribution of E&P. Three years ago, X purchased for cash the 50 shares of S nonqualified preferred stock. Today, X distributes all of the S common stock and 20 of the S nonqualified preferred shares to A while transferring the 30 remaining shares of S nonqualified preferred to B in exchange for B's nonqualified preferred stock of X.

Treatment: Generally, stock of a controlled corporation distributed in a transaction satisfying the requirements of §355(a) is non-recognition property - the recipient shareholders recognize neither gain nor loss on the receipt of the subsidiary stock. This general rule generally does not apply, however, to controlled corporation stock acquired in taxable transactions within the last 5 years. §355(a)(3)(B). This stock is generally treated as boot instead. But, this controlled corporation stock as boot exception does not apply to determine the treatment to shareholders from distributions of nonqualified preferred stock. Instead, §355(a)(3)(D) applies, and this provision generally indicates that nonqualified preferred stock distributed with respect to stock is treated as neither stock nor securities. Accordingly, the 20 shares of S nonqualified preferred stock received by A will be treated as boot received by A. But, an exception in §355(a)(3)(D) provides that this treatment of nonqualified preferred stock as neither stock or securities does not apply to distributions of nonqualified preferred stock with respect to nonqualified preferred stock. Hence, B will not treat the receipt of the S nonqualified preferred stock as boot.

        (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 holder's holding period.

Sections 355(a)(3)(C) Ex. 1, (4)(B) Ex. 1

Assumptions: X and S have each conducted their respective businesses for more than 5 years. The transaction is not used principally for the distribution of E&P. The X bond owned by A had accrued but unpaid interest of 2. This outstanding obligation was satisfied by the cash of 2 distributed to A.

Treatment: §355(a)(1) generally applies to the transaction, providing A with non-recognition treatment. This treatment does not, however, apply to any stock, securities, or, as here, other property received attributable to interest accrued on securities after the beginning of the holder's holding period. §355(a)(3)(C). Furthermore, §356 (including §§356(a)(1) & (2)) does not apply to A's receipt of this 2. Instead, the cash received will be treated as interest income. §§355(a)(4)(B) & 61(a)(4).

Sections 355(a)(3)(C) Ex. 2, (a)(4)(B) Ex. 2

Assumptions: X and S have each conducted their respective businesses for more than 5 years. The transaction was not used principally as a device for the distribution of E&P. In addition, to receiving all of the common stock of S, A receives 1 share of S preferred stock which must be redeemed in 5 years. This stock is received in satisfaction of the accrued but unpaid interest of 2 on the X bond owned by A.

Treatment: §355(a)(1) generally applies to the transaction, providing A with non-recognition treatment. But, even though A received only stock of S, some of this stock, the 1 share of preferred, was received for interest accrued on the X bond. As a result, A has interest income of 2. §§356(a)(3)(C) & (4)(B). This rule applies to all stock (or securities or other property) received for interest, including, as is true here, nonqualified preferred stock. The S preferred is nonqualified because the issuer is required to redeem it. §351(g)(2)(A)(ii).

        (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.

Sections 355(a)(3)(B) Ex. 3, (D)

      (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.

Sections 355(a)(3)(B) Ex. 1, (a)(4)Ex. 1, 356(a)(1) Ex. 3

Assumptions: P has owned 90% of S for more than 5 years. 3 years ago P purchased the remaining 10% of S from a third party. P and S have conducted their respective businesses for more than 5 years.

P exchanges all of its S stock with shareholder B in exchange for all 50 P shares owned by B. The transaction is not used principally as a device for the distribution of E&P.

Sections 355(a)(3), (a)(4) Ex. 2, 356(a)(1) Ex. 4, (d)(1) Ex. 2, (d)(2)(A) Ex. 2, (d)(2)(C)

Sections 355(a)(3)(C) Ex. 1, (4)(B) Ex. 1

Sections 355(a)(3)(C) Ex. 2, (a)(4)(B) Ex. 2

    (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

Sections 355(a)(1)(C) Ex. 1, (b)(1)(A) Ex. 1, (c)(1) Ex. 1, (c)(2)(B) Ex. 1, (c)(3) Ex. 1

Assumptions: P and S have each owned and operated the Widget and Cog businesses, respectively, for more than 5 years.

Sections 355(a)(1)(C) Ex. 2, (b)(1)(A) Ex. 2

Assumptions: P, S1 and S2 have each owned and conducted their respective businesses for more than 5 years.

Sections 355(a)(1)(C) Ex. 4, (b)(1) Ex. 3, (b)(2)(A) Ex. 1, (b)(3) Ex. 1

Assumptions: P has no assets other than the controlling stock interests in S1, S2 and S3. S2 and S3 have each owned and conducted their respective businesses for more than 5 years.

          (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.

Sections 355(a)(1)(C) Ex. 3, (b)(1)(B) Ex. 1, (c)(1) Ex. 4, (c)(3) Ex. 2

Assumptions: S and T have each owned and conducted their respective business for more than 5 years.

As a result of §355 applying, §336 does not apply and P does not recognize gain or loss on the liquidation. §§355(c)(1) & (3).

      (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, or substantially all of its assets consist of stock

        and securities of a corporation controlled by it (immediately

        after the distribution) which is so engaged,

Sections 355(a)(1)(C) Ex. 4, (b)(1) Ex. 3, (b)(2)(A) Ex. 1, (b)(3) Ex. 1

Assumptions: P has no assets other than the controlling stock interests in S1, S2 and S3. S2 and S3 have each owned and conducted their respective businesses for more than 5 years.

Sections 355(a)(1)(C) Ex. 5, (b)(2)(A) Ex. 2, (b)(3) Ex. 2

Assumptions: P and S2 have both conducted their respective businesses for more than 5 years. S1 does not directly conduct a trade or business.

Sections 355(b)(2)(A) Ex. 3, (b)(3) Ex. 3

Assumptions: L and S1 have each conducted their respective businesses for more than 5 years. P is a holding company with no other assets. L is a §801 life insurance company.

Treatment: While S1, the controlled corporation, directly conducts a business, P, the distributing corporation, does not. But, P nonetheless satisfies the requirements of §355(b)(2)(A) by virtue of §355(b)(3). P owns stock satisfying the requirements of §1504(a). P and L are normally not, however, considered an affiliated group because L is not an includible corporation (but, see §1504(c)). They are considered a "separate affiliated group" as defined in §355(b)(3)(B) because the group is determined for purposes of that provision by ignoring §1504(b). Hence, P will be deemed to be engaged in the active conduct of a business. §355(b)(2)(A).

          (B) such trade or business has been actively conducted

        throughout the 5-year period ending on the date of the

        distribution,

Sections 355(b)(2)(B), (c)

Assumptions: The Widget business is 3 years old. The Cog business is 7 years old, but P bought this business 3 years ago for cash from a person that had been conducting the business for 4 years. The Miscellaneous business has been conducted by P since inception 8 years ago. S has been conducting the Other business since S acquired it 4 years ago from S's subsidiary when that subsidiary liquidated under §332. S's subsidiary had conducted the Other business since the business's inception 7 years ago.

Treatment: P will be considered to be engaged in the active conduct of a business by virtue of conducting the Miscellaneous business only. P has conducted the Miscellaneous business for 8 years, satisfying §355(b)(2). The Widget business does not satisfy §355(b)(2) because it has been conducted for less than 5 years. §355(b)(2)(B). The Cog business also does not satisfy §355(b)(2) because, while the business has been conducted for more than 5 years, it was acquired in a taxable transaction within those last 5 years. §355(b)(2)(C).

S will also be considered to be engaged in the active conduct of a business. The Other business has been conducted for 7 years, thereby satisfying §355(b)(2)(B). And, while S acquired the Other business less than 5 years ago, the acquisition was not one in which gain or loss was recognized, thus satisfying §355(b)(2)(C).

          (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

Sections 355(a)(3)(B) Ex. 2, (b)(2)(D)(i) Ex. 1

Section 355(b)(2)(D)(i) Ex. 2

Assumptions: X, previously a holding company, bought Z from a third party 4 years ago for cash. Z liquidated 3 years ago. The Widget business was conducted by Z for 6 years prior to Z's liquidation.

Treatment: S is engaged in the active conduct of a trade or business, satisfying §355(b)(2). But X does not satisfy §355(b)(2). While X actively conducts the Widget business (§355(b)(2)(A)), and such business has been actively conducted for more than 5 years (§355(b)(2)(B)), and the business was not acquired in a recognition transaction (§355(b)(2)(C) by virtue of §332), control of Z, which conducted the Widget business, was acquired in a recognition transaction by the distributing corporation X and, therefore, §355(b)(2)(D) is not satisfied and §355 does not apply. §355(b)(2)(D)(i).

            (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.

Section 355(b)(2)(D)(ii)Ex. 1

Assumptions: X, previously a holding company, acquired Z in a stock-for-stock (B) reorganization 4 years ago. Z liquidated 3 years ago. The Widget business was conducted by Z for 6 years prior to Z's liquidation.

Treatment: S is engaged in the active conduct of a business, satisfying §355(b)(2). X actively conducts the Widget business, satisfying §355(b)(2)(A), and this business has been actively conducted for more than 5 years, satisfying §355(b)(2)(B). The business was not acquired by X in a recognition transaction - Z's liquidation into X was tax-free under §332 - thereby satisfying §355(b)(2)(C). X does not satisfy §355(b)(2)(D)(i). But, §355(b)(2)(D)(ii) is satisfied because, while X, the distributing corporation, acquired Z, the corporation conducting the Widget business, within the last 5 years (thereby not satisfying §355(b)(2)(D)(i)), X acquired Z in a non-recognition transaction. Hence, §355(b)(2)(D) and, hence, §355(b)(2) are satisfied. And, if the other requirements are satisfied, §355 applies to the spin-off.

Section 355(b)(2)(D)(ii) Ex. 2

Assumptions: X does not directly conduct a business. In a first transaction, more than 5 years ago, X purchased a minority interest in Z. In a second transaction, 4 years ago, X acquired the remaining Z stock in exchange for X voting stock. X distributes S today.

Treatment: Both S and X are considered engaged in the active conduct of a business, satisfying §355(b)(2). X and Z are a separate affiliated group which conducts the Widget business and X, the common parent of this group, is therefore treated as conducting that business. The Widget business is considered to satisfy §355(b)(2)(D)(ii) because while X acquired control of Z in the last 5 years, it did so through only a non-recognition transaction within the last 5 years and other acquisitions (in this instance, taxable) more than 5 years ago.

Section 355(b)(2)(D)(ii) Ex. 3

Assumptions: X does not directly conduct a business. In a first transaction 4 years ago, X purchased 40% of Z. In a second transaction 3 years ago, X acquired the remaining Z stock in exchange for X voting stock. X distributes S today.

Treatment: Only S is considered engaged in the active conduct of a business, and therefore only S satisfies §355(b)(2). X does not satisfy §355(b)(2)(D)(i) because it acquired Z, which conducts the Widget business, within the last 5 years. X does not satisfy §355(b)(2)(D)(ii) because although the actual transaction in which control was achieved was a non-recognition transaction, control was not acquired only by reason of such non-recognition transactions within the last 5 years and/or transactions more than 5 years previous - X's cash purchase of 40% of Z within the last 5 years precludes §355 treatment.

        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 rule relating to active business

        requirement.--

                    (A) In general.--In the case of any distribution

                made after the date of the enactment of this paragraph,

                a corporation shall be treated as meeting the requirement

                of paragraph (2)(A) if and only if such corporation is

                engaged in the active conduct of a trade or business.

                    (B) Affiliated group rule.--For purposes of

                subparagraph (A), all members of such corporation's

                separate affiliated group shall be treated as one

                corporation. For purposes of the preceding sentence, a

                corporation's separate affiliated group is 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) Transition rule.--Subparagraph (A) shall not

                apply to any distribution pursuant to a transaction

                which is--

                          (i) made pursuant to an agreement which was

                      binding on the date of the enactment of this

                      paragraph and at all times thereafter,

                          (ii) described in a ruling request submitted

                      to the Internal Revenue Service on or before such

                      date, or

                          (iii) described on or before such date in a

                      public announcement or in a filing with the

                      Securities and Exchange Commission.

                The preceding sentence shall not apply if the

                distributing corporation elects not to have such

                sentence apply to distributions of such corporation. Any

                such election, once made, shall be irrevocable.

                    (D) Special rule for certain pre-enactment

                distributions.--For purposes of determining the

                continued qualification under paragraph (2)(A) of

                distributions made on or before the date of the

                enactment of this paragraph as a result of an

                acquisition, disposition, or other restructuring after

                such date, such distribution shall be treated as made

                on the date of such acquisition, disposition, or restructuring

                for purposes of applying subparagraphs (A) through (C) of

                this paragraph.

Sections 355(a)(1)(C) Ex. 4, (b)(1) Ex. 3, (b)(2)(A) Ex. 1, (b)(3) Ex. 1

Assumptions: P has no assets other than the controlling stock interests in S1, S2 and S3. S2 and S3 have each owned and conducted their respective businesses for more than 5 years.

Sections 355(a)(1)(C) Ex. 5, (b)(2)(A) Ex. 2, (b)(3) Ex. 2

Assumptions: P and S2 have both conducted their respective businesses for more than 5 years. S1 does not directly conduct a trade or business.

Sections 355(b)(2)(A) Ex. 3, (b)(3) Ex. 3

Assumptions: L and S1 have each conducted their respective businesses for more than 5 years. P is a holding company with no other assets. L is a §801 life insurance company.

    (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.

Sections 355(a)(1)(C) Ex. 1, (b)(1)(A) Ex. 1, (c)(1) Ex. 1, (c)(2)(B) Ex. 1, (c)(3) Ex. 1

Assumptions: P and S have each owned and operated the Widget and Cog businesses, respectively, for more than 5 years.

Section 355(c)(1) Ex. 3

Assumptions: P and S have each owned and operated the Widget and Cog businesses, respectively, for more than 5 years. The transaction is assumed to not be principally a device for the distribution of E&P.

Treatment: Because P distributed cash in addition to stock of the controlled corporation, S, §355 does not apply. But, §356 does apply, so P will not recognize gain or loss on the distribution. §355(c)(1).

Sections 355(a), (c)(1) Ex. 2, 368(a)(1)(D) Ex. 1, 312(h), 358(c) Ex. 2, 361(c) Ex. 1

Assumptions: X has conducted both Widget and Cog businesses directly for 25 years. The transaction was not used principally as a device for the distribution of earnings and profits.

Sections 355(a)(1)(C) Ex. 3, (b)(1)(B) Ex. 1, (c)(1) Ex. 4, (c)(3) Ex. 2

Assumptions: S and T have each owned and conducted their respective business for more than 5 years.

As a result of §355 applying, §336 does not apply and P does not recognize gain or loss on the liquidation. §§355(c)(1) & (3).

      (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.

Sections 355(c)(2)(A) Ex. 1, (c)(2)(B) Ex. 2, 356(b) Ex. 2, 358(a)(1) Ex.6, (a)(2) Ex.4, (c) Ex. 2

Treatment: The transaction would have qualified under §355 but for the distribution of boot, so §356 applies to A. Under §356(b), A is treated as receiving a §301 distribution which might be treated as a dividend under §301(c)(1) if P has sufficient E&P. A will presumably have a basis of 60 in S and 120 in P following the distribution ((180 + 80 - 80) allocated according to respective FMVs of P and S after the distribution). §§358(a)(1) & (c) and Reg. §§1.358-2(a)(1) & (2). A will have a tacked holding period in S. §1223(1). A will have FMV bases of 50 and 30, respectively, in the land and equipment.

§355(c) applies to P. The stock of S is qualified property (§355(c)(2)(B)) and so, P does not recognize the gain of 30 on the distribution of S stock. P recognizes the gain of 30 on the distribution of the appreciated land (50 - 20), but does not recognize the realized loss of 10 on the distribution of the equipment. §§355(c)(1), (2)(A).

        (B) Qualified property

          For purposes of subparagraph (A), the term ''qualified

        property'' means any stock or securities in the controlled

        corporation.

Sections 355(a)(1)(C) Ex. 1, (b)(1)(A) Ex. 1, (c)(1) Ex. 1, (c)(2)(B) Ex. 1, (c)(3) Ex. 1

Assumptions: P and S have each owned and operated the Widget and Cog businesses, respectively, for more than 5 years.

Sections 355(c)(2)(A) Ex. 1, (c)(2)(B) Ex. 2, 356(b) Ex. 2, 358(a)(1) Ex.6, (a)(2) Ex.4, (c) Ex. 2

        (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.

Section 355(c)(2)(C)

Assumptions: P and S have each owned and operated the Widget and Cog businesses respectively, for more than 5 years. The transaction is assumed to not be principally a device for the distribution of E&P.

Treatment: The transaction is pursuant to §356 because §355 would apply but for the distribution of boot, the land, by X. X's income consequences are dictated by §355(c). Where appreciated property is distributed, X recognizes gain as though the property were sold to the shareholder. But where, as here, the liabilities on such property exceeds the property's FMV, then the gain is computed by treating the amount realized as equalling the liability. X therefore recognizes a gain of 25 = 55 - 30. A is presumably treated as having made a capital contribution of 5, and A presumably still has a FMV basis of 50 in the land.

      (3) Coordination with sections 311 and 336(a)

        Sections 311 and 336(a) shall not apply to any distribution

      referred to in paragraph (1).

Sections 355(a)(1)(C) Ex. 1, (b)(1)(A) Ex. 1, (c)(1) Ex. 1, (c)(2)(B) Ex. 1, (c)(3) Ex. 1

Assumptions: P and S have each owned and operated the Widget and Cog businesses, respectively, for more than 5 years.

Sections 355(a)(1)(C) Ex. 3, (b)(1)(B) Ex. 1, (c)(1) Ex. 4, (c)(3) Ex. 2

Assumptions: S and T have each owned and conducted their respective business for more than 5 years.

As a result of §355 applying, §336 does not apply and P does not recognize gain or loss on the liquidation. §§355(c)(1) & (3).

Sections 355(b)(2)(B), (c)

    (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 holder's 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 <<NOTE: Applicability.>> 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) <<NOTE: Applicability.>> 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 <<NOTE: Applicability.>> 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.