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 FMVs312(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)

 
 
 

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.

 
 
 (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.

 

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), (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).

 

 

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).

 

 
 
 (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.

 

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. 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.

 

 

 
 
 (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.

 

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).

 
 
 (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.

 

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).

 

 

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

 
 
 

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.

 

 

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.

 

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).

 

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).

 

 

 
 
 (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.

 

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).

 
 

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.

 

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 FMVs312(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.

 

 

 

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).

 

 
 
 (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

 
 
 

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 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.

 

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(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

 
 
 

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 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).

 

 
 (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.

 

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. 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(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).

 

 

 
 
 (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.