Sec

Sec. 356. Receipt of additional consideration

    (a) Gain on exchanges

      (1) Recognition of gain

        If -

          (A) section 354 or 355 would apply to an exchange but for the

        fact that

          (B) the property received in the exchange consists not only

        of property permitted by section 354 or 355 to be received

        without the recognition of gain but also of other property or

        money,

      then the gain, if any, to the recipient shall be recognized, but

      in an amount not in excess of the sum of such money and the fair

      market value of such other property.

Sections 356(a)(1) Ex. 1, (a)(2) Ex. 1, 354(a)(3)(A)

Treatment: A has a realized gain of 1,325,000, AR of 1,750,000 (1,000,000 P stock + 750,000 cash) less AB of 425,000. Because this transaction is an A reorganization, §354 would apply but for A's receipt of boot. §356 therefore applies. §354(a)(3)(A). As a result, A recognizes the realized gain to the extent of boot received by A. §356(a)(1). Hence, of the realized gain of 1,325,000, A recognizes 750,000. This gain will be treated as a dividend if the transaction (exchange) has the effect of a dividend. This test is determined by treating A as having hypothetically received an additional 7,500 shares of P stock (i.e., stock worth 750,000) instead of cash, and then had those shares redeemed by P in exchange for cash of 750,000. Clark v. CIR, 489 US 726 (1989). Principally due to A's clear minority position in P, this hypothetical redemption would be treated, hypothetically, as a sale or exchange, not a distribution. Accordingly, A's gain will be treated not as a dividend but as though in exchange for the stock, likely long-term capital gain.

Sections 356(a)(1) Ex. 2, (a)(2) Ex. 2

Treatment: A has a realized gain of 50, AR of 175 (P stock FMV 140 + land FMV 35) less AB of 125. Because thi transaction is an A reorganization, §354 would apply but for A's receipt of boot. Therefore, §356 applies. As a result, A recognizes the realized gain to the extent of boot received by A. §356(a)(1). Hence, of the realized gain of 50, A recognizes 35. This gain is treated as a dividend if the transaction (exchange) has the effect of a dividend. §356(a)(1). This determination is made by hypothetically treating A as having received an additional 17 1/2 P shares (instead of boot) and then P having redeemed these shares for the boot. Clark v. CIR, 489 US 726 (1989). In this hypothetical redemption, tested under §302, A would not have a meaningful reduction, and §§302(b)(2) and, presumably, (b)(1), would not be satisfied and therefore the reorganization does have the effect of a dividend, and therefore, A's gain is treated as a dividend, not in excess of A's ratable share of E&P: 70% x 20 = 14. The remaining 21 of gain would likely be long-term capital gain, as would any gain that B might have - B, a minority shareholder, would be deemed to have a meaningful reduction in a hypothetical redemption.

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 356(a)(1) Ex. 5, (2) Ex. 3, 368(a)(1)(A) Ex. 1, (b)(2) Ex. 1

Assumptions: The transaction is not a disguised §301 distribution.

Treatment: The transaction is an A reorganization because it is a statutory merger. §368(a)(1)(A). Both X, the corporation whose assets were acquired, and Y, the acquirer of those assets, are parties to a reorganization. §368(b)(2). A has a realized gain of 1 AR 66 - AB 65). A's recognized gain is 1, the lesser of the realized gain of or the boot received of 6. §356(a)(1). The character of that gain is determined by §356(a)(2). Because A continues to be a 60% (majority) shareholder receiving boot proportional to that ownership, the likely result is that the exchange has the effect of a dividend distribution to A (but not B). The dividend treatment is limited, however, to A's gain recognized under §356(a)(1) as well as A's ratable share of accumulated E&P. Apparently, accumulated E&P is he combined E&P of X and Y. A's ratable portion would be 2.40 = 60% x (2 + 2). But, A's recognized gain of 1 is less. So, A would have dividend income of 1.

      (2) Treatment as dividend

        If an exchange is described in paragraph (1) but has the effect

      of the distribution of a dividend (determined with the

      application of section 318(a)), then there shall be treated as a

      dividend to each distributee such an amount of the gain

      recognized under paragraph (1) as is not in excess of his ratable

      share of the undistributed earnings and profits of the

      corporation accumulated after February 28, 1913. The remainder,

      if any, of the gain recognized under paragraph (1) shall be

      treated as gain from the exchange of property.

Sections 356(a)(1) Ex. 1, (a)(2) Ex. 1, 354(a)(3)(A)

Sections 356(a)(1) Ex. 2, (a)(2) Ex. 2

Sections 356(a)(1) Ex. 5, (2) Ex. 3, 368(a)(1)(A) Ex. 1, (b)(2) Ex. 1

Assumptions: The transaction is not a disguised §301 distribution.

    (b) Additional consideration received in certain distributions

      If -

        (1) section 355 would apply to a distribution but for the fact

      that

        (2) the property received in the distribution consists not only

      of property permitted by section 355 to be received without the

      recognition of gain, but also of other property or money,

    then an amount equal to the sum of such money and the fair market

    value of such other property shall be treated as a distribution of

    property to which section 301 applies.

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.

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) Loss

      If -

        (1) section 354 would apply to an exchange or section 355 would

      apply to an exchange or distribution, but for the fact that

        (2) the property received in the exchange or distribution

      consists not only of property permitted by section 354 or 355 to

      be received without the recognition of gain or loss, but also of

      other property or money,

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

Sections 356(c) Ex. 1, 358(a)(1) Ex. 8, (a)(2) Ex. 5

Treatment: The transaction is an A reorganization. §368(a)(1)(A). A has a realized loss of 70, AR 150 - AB 220. §354(a) would have applied but for A's receipt of boot. §356 therefore applies. More particularly, A does not recognize any of the loss even though A received boot. §356(c). A's basis in the land equals its FMV of 50. §358(a)(2). A's basis in the P stock will equal 170 = A's basis in the T stock of 220 plus gain recognized by A of 0 less the FMV of boot received by A of 50.

Section 356(c) Ex. 2

Assumptions: X and S have each operated their respective businesses for more than 5 years. The transaction is not used principally as a device for the distribution of E&P.

Treatment: The transaction would have qualified under §355 but for A's receipt of the boot, land. §356 therefore applies. A has a realized loss of 90, AR of 130 less AB of 220. A does not recognize that loss. §356(c). A receives a FMV basis of 30 in the land. §358(a)(2). A receives basis of 190 in the stock of S: A's basis in the X stock of 220 plus A's gain recognized of 0 less A's loss recognized of 0 less the FMV of A's bot received of 30. The S stock will get a tacked holding period. §1223(1).

    (d) Securities as other property

      For purposes of this section -

      (1) In general

        Except as provided in paragraph (2), the term ''other

      property'' includes securities.

Sections 354(a)(2)(A)(i) Ex. 1, 356(d)(1) Ex. 1, (d)(2)(A) Ex. 1, (d)(2)(B) Ex. 1

Treatment: The transaction is an A reorganization. §368(a)(1)(A). A's treatment would have been dictated by §354 but for the receipt of boot. The boot is the excess principal amount of 5 in the bonds. §354(a)(2)(A)(i). Because §354 does not apply due to the receipt of boot, §356 applies. As a general rule, boot ("other property") includes securities. §356(d)(1). But, boot does not include securities to the extent those securities could be received without recognition of gain. §356(d)(2)(A). Here, that amount is 10, equal to the principal amount of T bonds surrendered by A. It is the FMV of the excess principal amount of the P bonds received by A that represents boot here. §356(d)(2)(B). Here, the excess principal amount and the FMV thereof are both 5 = 15 - 10. A would therefore recognize any realized gain to the extent of this boot received of 5.

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)

      (2) Exceptions

        (A) Securities with respect to which nonrecognition of gain

            would be permitted

          The term ''other property'' does not include securities to

        the extent that, under section 354 or 355, such securities

        would be permitted to be received without the recognition of

        gain.

Sections 354(a)(2)(A)(i) Ex. 1, 356(d)(1) Ex. 1, (d)(2)(A) Ex. 1, (d)(2)(B) Ex. 1

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)

        (B) Greater principal amount in section 354 exchange

          If -

            (i) in an exchange described in section 354 (other than

          subsection (c) thereof), securities of a corporation a party

          to the reorganization are surrendered and securities of any

          corporation a party to the reorganization are received, and

            (ii) the principal amount of such securities received

          exceeds the principal amount of such securities surrendered,

        then, with respect to such securities received, the term

        ''other property'' means only the fair market value of such

        excess.  For purposes of this subparagraph and subparagraph (C)

        if no securities are surrendered, the excess shall be the

        entire principal amount of the securities received.

Sections 354(a)(2)(A)(i) Ex. 1, 356(d)(1) Ex. 1, (d)(2)(A) Ex. 1, (d)(2)(B) Ex. 1

Sections 354(a)(2)(A)(ii), 356(d)(2)(B) Ex. 2

Treatment: A has a realized gain of 60 = 100 AR - 40 AB. But for the receipt of boot, §354(a)(1) would apply to A. The boot here is the P bond received by A - where securities in a party to a reorganization are received but no such securities are surrendered, §354(a)(1) does not apply. §354(a)(2)(A)(ii). §356 instead applies. Boot ("other property") includes the FMV of the principal amount of securities received over the principal amount of securities surrendered, and where no securities are surrendered, the entire principal amount of securities received is treated as the excess. §356(d)(2)(B). Because FMV = face here, the boot equals 20. And so, of A's realized gain of 60, A will recognize 20. A will have a basis in the P stock of 40 = AB 40 in T + gain recognized of 20 less boot received of 20. §358(a)(1). A will have a FMV basis of 20 in the P bond. §358(a)(2).

        (C) Greater principal amount in section 355 transaction

          If, in an exchange or distribution described in section 355,

        the principal amount of the securities in the controlled

        corporation which are received exceeds the principal amount of

        the securities in the distributing corporation which are

        surrendered, then, with respect to such securities received,

        the term ''other property'' means only the fair market value of

        such excess.

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)

    (e) Nonqualified preferred stock treated as other property

      For purposes of this section -

      (1) In general

        Except as provided in paragraph (2), the term ''other

      property'' includes nonqualified preferred stock (as defined in

      section 351(g)(2)).

Sections 354(a)(2)(C)(i) Ex. 1, 356(e)(1) Ex. 1, (e)(2) Ex. 1

Assumptions: Both the T preferred and the P preferred contains clauses allowing A to require the issuer to redeem on demand such stock at face, which such amount is equal between the T and P stock.

Treatment: The transaction is an A reorganization. §368(a)(1)(A). Both the T and P preferred stock is considered nonqualified preferred stock ("NQPS") because the holder can require the issuer to redeem the stock. §351(g)(2)(A)(i). While NQPS received in exchange for stock is generally considered boot, (§§354(a)(2)(C)(i) & 356(e)(1)), this rule does not apply when NQPS is received for other NQPS. §§354(a)(2)(C)(i), 356(e)(2). Accordingly, the P preferred stock is treated as stock for purposes of §354, and A does not recognize gain or loss from the transaction.

      (2) Exception

        The term ''other property'' does not include nonqualified

      preferred stock (as so defined) to the extent that, under section

      354 or 355, such preferred stock would be permitted to be

      received without the recognition of gain.

Sections 354(a)(2)(C)(i) Ex. 1, 356(e)(1) Ex. 1, (e)(2) Ex. 1

Assumptions: Both the T preferred and the P preferred contains clauses allowing A to require the issuer to redeem on demand such stock at face, which such amount is equal between the T and P stock.

Sections 354(a)(2)(C)(i) Ex. 2, 356(e)(1) Ex. 2, (e)(2) Ex. 2

Assumptions: Both the T preferred and the P preferred contains clauses allowing A to require the issuer to redeem on demand such stock at face, which amount equals the indicated FMV.

Treatment: The transaction is an A reorganization. §368(a)(1)(A). Both the T and P preferred stock is considered nonqualified preferred stock ("NQPS") because the holder can require the issuer to redeem the stock. §351(g)(2)(A)(i). NQPS received in exchange for stock is considered boot except to the extent received for other NQPS. §§354(a)(2)(C)(i), 356(e)(1) & (2). Here, A received 20 FMV of P NQPS in exchange for T NQPS. This amount will therefore be considered stock. The remaining 10 of P NQPS will be considered boot received by A. Hence, of A's gain realized of 25 ((90 + 30) - (80 + 15)), only 10 is recognized.

    (f) Exchanges for section 306 stock

      Notwithstanding any other provision of this section, to the

    extent that any of the other property (or money) is received in

    exchange for section 306 stock, an amount equal to the fair market

    value of such other property (or the amount of such money) shall be

    treated as a distribution of property to which section 301 applies.

Section 356(f)

Assumptions: The X preferred stock owned by A is §306 stock.

Treatment: The transaction is an A reorganization. §368(a)(1)(A). A does not have a realized gain because A's basis (total 110) exceeds A's amount realized (total 110). Nonetheless, A has dividend income. The facts suggest that A has received boot of 10 in exchange for the §306 stock. Accordingly, A is considered to have received a §301 distribution equal to the boot received for the §306 stock. §356(f).

    (g) Transactions involving gift or compensation

        For special rules for a transaction described in section 354,

      355, or this section, but which -

          (1) results in a gift, see section 2501 and following, or

Section 356(g)(1)

Treatment: The transaction is an A reorganization. §368(a)(1)(A). Father and Daughter have each received 50 shares of P even though Father was a 60% shareholder of the target X while Daughter was only a 40% shareholder. These facts strongly suggest that the transaction was used in part as a gift from Father to Daughter. Accordingly, tax effect should be given to this implicit gift. §356(g)(1). The transaction would, in essence, be reconstructed as though P gave Father and Daughter, respectively, 60 and 40 P shares, and Father then made a gift of 10 P shares to Daughter, subject to possible gift tax.

          (2) has the effect of the payment of compensation, see

        section 61(a)(1).

Section 356(g)(2)

Assumptions: In addition to being a shareholder of X, A is a key employee whose continued services became a major incentive in P acquiring X and in P giving A 20 more shares than was given B, an equal X shareholder.

Treatment: The transaction is an A reorganization. §368(a)(1)(A). While such transactions are normally tax-free to the target shareholders, §354, if stock or securities are issued in payment for services, those stocks or securities are treated not under §§354 or 356, but instead as compensation income under §61. §356(g)(2).