Sec. 361. Nonrecognition of gain or loss to corporations; treatment
 of distributions
 
(a) General rule
 No gain or loss shall be recognized to a corporation if such
 corporation is a party to a reorganization and exchanges property,
 in pursuance of the plan of reorganization, solely for stock or
 securities in another corporation a party to the reorganization.
 

Sections 368(a)(1)(C) Ex. 1, 354(a)(1) Ex. 1, 358(a)(1) Ex. 7, 361(a) Ex.1, (c)(1) Ex. 2, (c)(4), 362(b) Ex. 5,

381(a) Ex. 1, (c)(1) Ex. 1, (c)(2) Ex. 3, 1032(a) Ex. 1, 1223(1) Ex. 1, (2) Ex. 1

 

 

Treatment:  The transaction is a C reorganization. 368(a)(1)(C).  T does not recognize gain or loss on the exchange of its assets for P stock.  361(a).  T also does not recognize gain or loss on the distribution of the P voting stock under 361(c)(1) and 336 does not apply to T.  361(c)(4).  P does not recognize gain on the use of its P stock.  1032(a).  A recognizes none of the realized gain of 200 (300 - 100), because A has received solely stock or securities of another party to the reorganization in exchange for stock or securities of a party to the reorganization.  354(a)(1).  A's basis in the stock received will equal 100, A's basis in the T stock surrendered.  358(a)(1).  A's holding period in the P stock will include A's holding period in the T stock.  1223(1).  P's bases in the T assets received will equal T's 200 bases in those assets .  362(b).  P's holding period in those assets will include T's holding period.  1223(2).  P will succeed to certain T attributes, including T's NOL carryover (subject to possible limitations) and T's E&P.  381(a), (c)(1) & (2).

 

 

Sections 361(a) Ex. 2, (c)(3)

 
 
 
 

Assumptions:  T transfers the P stock and the marketable stock to B pursuant to a plan of reorganization.

 

Treatment:  The transaction is a C reorganization.  368(a)(1)(C).  T does not recognize gain or loss on the exchange with P because all assets are exchanged solely for voting stock of P.  361(a).  T does not recognize gain or loss on the distribution of P stock to A.  361(c)(1) & (2).  Similarly, T does not recognize gain on the distribution of P stock to creditor B because distributions of qualified property to creditors are treated the same as though distributed to shareholders for this purpose.  361(c)(2)(B) & (3).  T will recognize its realized gain of 2 on the transfer of land to B.

 

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

Sections 361(b)(1)(A), (c)(1) Ex. 3, 368(a)(1)(C) Ex. 2, (a)(2)(B) Ex. 1, (G)(i) Ex. 1

 
 
 
 

Assumptions:  The transaction is pursuant to a plan of reorganization.

 

Treatment:  The transaction is a C reorganization.  368(a)(1)(C).  While it does not satisfy the strict language of 368(a)(1)(C) itself, it qualifies by virtue of 368(a)(2)(B) - the P voting stock used has FMV of at least 80% of the FMV of T's assets (60 >= (80% x 70)).  Furthermore, T transfers all the stock, securities and other properties it receives (here, P stock and cash) and it has none of its own assets to distribute.  Thus, the requirements of 368(a)(2)(G) are satisfied.  Because T has distributed all of the P cash received, T does not recognize gain or loss on the exchange, 361(b)(1)(A), nor on the distribution, 361(c)(1).  Note that due to the distribution requirement of 368(a)(2)(C), 361(b)(1)(A) should always be satisfied in a C reorganization.

 

 
 
 
 (B) Property not distributed
 If the corporation receiving such other property or money
 does not distribute it in pursuance of the plan of
 reorganization, the gain, if any, to the corporation shall be
 recognized.
 The amount of gain recognized under subparagraph (B) shall not
 exceed the sum of the money and the fair market value of the
 other property so received which is not so distributed.
 
 

Section 361(b)(1)(B)

 
 
 

Assumptions:  P and S1 have actively conducted their respective businesses for more than 5 years.

 

Treatment:  The transaction is a divisive D reorganization.  368(a)(1)(D) by virtue of 355 and 356.  P has a realized gain of 30 on the exchange of its Widget assets with Newco ((70 + 10) - 50).  While P would generally not recognize this realized gain to the extent it receives boot which is not distributed.  361(b)(1)(B).  Hence, P will recognize a gain of 4, equal to the boot received but not distributed (but no more than the realized gain of 30).

 

 
 
 (2) Loss
 If subsection (a) would apply to an exchange but for the fact
 that the property received in exchange consists not only of
 property permitted by subsection (a) to be received without the
 recognition of gain or loss, but also of other property or money,
 then no loss from the exchange shall be recognized.
 
 

Section 361(b)(2)

 
 
 
 

Assumptions:  The transaction is pursuant to a plan of reorganization.

 

Treatment:  The transaction is a C reorganization.  368(a)(1)(C).  (see also 368(a)(2)(B), & (G), which qualify it under 368(a)(1)(C)).  T has a realized loss of 60 ((60 + 10) - 130), but T does not recognize any of this loss even though it has received boot.  361(b)(1)(B).  T also does not recognize any gain or loss on the distribution upon liquidation.  361(c)(1).

 

 
 
 (3) Treatment of transfers to creditors
 For purposes of paragraph (1), any transfer of the other
 property or money received in the exchange by the corporation to
 its creditors in connection with the reorganization shall be
 treated as a distribution in pursuance of the plan of
 reorganization. The Secretary may prescribe such regulations as
 may be necessary to prevent avoidance of tax through abuse of the
 preceding sentence or subsection (c)(3). In the case of a
 reorganization described in section 368(a)(1)(D) with respect to
 which stock or securities of the corporation to which the assets
 are transferred are distributed in a transaction which qualifies
 under section 355, this paragraph shall apply only to the extent
 that the sum of the money and the fair market value of other 
property transferred to such creditors does not exceed the 
adjusted bases of such assets transferred (reduced by the amount 
of the liabilities assumed (within the meaning of section 357(c))).
 
 

Sections 361(b)(3) Ex. 1, (c)(1) Ex. 4, 368(a)(1)(C) Ex. 3, (a)(2)(G)(i) Ex. 3, (b)(2) Ex. 3

 
 
 

Assumptions:  B, not a shareholder of T, is a creditor of T, owed 50.  T pays B in satisfaction of that debt pursuant to the plan of reorganization.

 

Treatment:  The transaction is a C reorganization.  368(a)(1)(C).  As a necessary component of a C reorganization, T must distribute the stock, securities and other properties it receives, as well as any other assets it has (here, there are no other assets, all T assets having been transferred to P).  While T did not distribute the 50 cash received from P to A, it did distribute to B, a creditor, pursuant to the reorganization and this will qualify for purposes of satisfying 368(a)(2)(G).

 

T will not recognize gain on its exchange with P.  While T would generally recognize realized gain to the extent it does not distribute boot received, 361(b)(1), a transfer of boot to creditors pursuant to the reorganization will suffice for this purpose.  368(b)(3).  T does not have a realized gain on the transfer of cash to B in satisfaction of the debt. 

 

Both T, the corporation whose assets are being acquired, and P, the acquirer of those assets, are considered parties to a reorganization.  368(b)(2).

 

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

Sections 368(a)(1)(C) Ex. 1, 354(a)(1) Ex. 1, 358(a)(1) Ex. 7, 361(a) Ex.1, (c)(1) Ex. 2, (c)(4) Ex. 2, 362(b) Ex. 5,

381(a) Ex. 1, (c)(1) Ex. 1, (c)(2) Ex. 3, 1032(a) Ex. 1, 1223(1) Ex. 1, (2) Ex. 1

 

 

Treatment:  The transaction is a C reorganization. 368(a)(1)(C).  T does not recognize gain or loss on the exchange of its assets for P stock.  361(a).  T also does not recognize gain or loss on the distribution of the P voting stock under 361(c)(1) and 336 does not apply to T.  361(c)(4).  P does not recognize gain on the use of its P stock.  1032(a).  A recognizes none of the realized gain of 200 (300 - 100), because A has received solely stock or securities of another party to the reorganization in exchange for stock or securities of a party to the reorganization.  354(a)(1).  A's basis in the stock received will equal 100, A's basis in the T stock surrendered.  358(a)(1).  A's holding period in the P stock will include A's holding period in the T stock.  1223(1).  P's bases in the T assets received will equal T's 200 bases in those assets .  362(b).  P's holding period in those assets will include T's holding period.  1223(2).  P will succeed to certain T attributes, including T's NOL carryover (subject to possible limitations) and T's E&P.  381(a), (c)(1) & (2).

 

 

 

Sections 361(b)(1)(A), (c)(1) Ex. 3, 368(a)(1)(C) Ex. 2, (a)(2)(B) Ex. 1, (G)(i) Ex. 1

 
 
 
 

Assumptions:  The transaction is pursuant to a plan of reorganization.

 

Treatment:  The transaction is a C reorganization.  368(a)(1)(C).  While it does not satisfy the strict language of 368(a)(1)(C) itself, it qualifies by virtue of 368(a)(2)(B) - the P voting stock used has FMV of at least 80% of the FMV of T's assets (60 >= (80% x 70)).  Furthermore, T transfers all the stock, securities and other properties it receives (here, P stock and cash) and it has none of its own assets to distribute.  Thus, the requirements of 368(a)(2)(G) are satisfied.  Because T has distributed all of the P cash received, T does not recognize gain or loss on the exchange, 361(b)(1)(A), nor on the distribution, 361(c)(1).  Note that due to the distribution requirement of 368(a)(2)(C), 361(b)(1)(A) should always be satisfied in a C reorganization.

 

 

Sections 361(b)(3) Ex. 1, (c)(1) Ex. 4, 368(a)(1)(C) Ex. 3, (a)(2)(G)(i) Ex. 3, (b)(2) Ex. 3

 
 
 

Assumptions:  B, not a shareholder of T, is a creditor of T, owed 50.  T pays B in satisfaction of that debt pursuant to the plan of reorganization.

 

Treatment:  The transaction is a C reorganization.  368(a)(1)(C).  As a necessary component of a C reorganization, T must distribute the stock, securities and other properties it receives, as well as any other assets it has (here, there are no other assets, all T assets having been transferred to P).  While T did not distribute the 50 cash received from P to A, it did distribute to B, a creditor, pursuant to the reorganization and this will qualify for purposes of satisfying 368(a)(2)(G).

 

T will not recognize gain on its exchange with P.  While T would generally recognize realized gain to the extent it does not distribute boot received, 361(b)(1), a transfer of boot to creditors pursuant to the reorganization will suffice for this purpose.  368(b)(3).  T does not have a realized gain on the transfer of cash to B in satisfaction of the debt. 

 

Both T, the corporation whose assets are being acquired, and P, the acquirer of those assets, are considered parties to a reorganization.  368(b)(2).

 
 
 

Section 361(b)(3) Ex. 2

 
 
 
 

Assumptions:  P and S have actively conducted their respective businesses for more 5 years.  The 25 owed to C is an accounts payable while the 60 owed to D is an assumable mortgage on land that is part of the Widget business and both the land and mortgage are transferred to Newco.  C is paid the 25 cash received from Newco as part of the plan of reorganization.

 

Treatment:  The transaction is a divisive D reorganization.  368(a)(1)(D), 355 & 356.  P has a realized gain of 230 ((215 + 25 + 60) - 70).  P would normally recognize any realized gain on the exchange with Newco only to the extent P does not distribute any boot received.  361(b)(1).  A transfer to a creditor pursuant to the reorganization is generally treated as a distribution for this purpose.  361(b)(3).  But, in a divisive D reorganization this rule only applies to the extent the boot transferred to creditors does not exceed the adjusted bases of assets transferred by P to Newco reduced by the liabilities also transferred by P to Newco.  Here, the adjusted bases of assets transferred reduced by liabilities also transferred = 10 (70 - 60).  The boot received by P and then distributed to C is 25.  Hence, P will recognize a gain of 15 on the exchange: 25 - 10.  Note that 357(c) would have produced a similar result if P had transferred all liabilities (of 85) to Newco (even if Newco transfers back only its own stock).  P would have recognized a gain of 15 equal to the excess of liabilities transferred (85) over bases of assets transferred (70).

 

 
 
 (2) Distributions of appreciated property
 (A) In general
 If -
 (i) in a distribution referred to in paragraph (1), the
 corporation distributes property other than qualified
 property, and
 (ii) the fair market value of such property exceeds its
 adjusted basis (in the hands of the distributing
 corporation),
 then gain shall be recognized to the distributing corporation
 as if such property were sold to the distributee at its fair
 market value.
 

Sections 361(c)(2)(A) Ex.1, (B)(ii) Ex. 1

 
 
 

Treatment:  The transaction is a C reorganization.  368(a)(1)(C).  T will recognize a gain of 2 upon the distribution of Marketable Stock 1, but will not recognize loss on the distribution of Marketable Stock 2.  T also does not recognize gain on distribution of the P stock.  361(c)(1) generally provides no gain or loss recognition on a distribution to shareholders pursuant to a reorganization.  But, 361(c)(2)(A) provides an exception where the corporation distributes appreciated property other than qualified property.  Because Marketable Stock 1 is not appreciated property, 361(c)(2) does not apply, 361(c)(1) does, and hence, T does not recognize this loss.  Qualified property includes stock of another corporation (i.e., other than the distributing corporation) a party to the reorganization received in the exchange (361(c)(2)(B)(ii)) - here, the P stock is qualified property, and hence, T does not recognize gain or loss when distributing this stock.  Marketable Stock 2 is appreciated property which is not qualified property, and so T does recognize its gain of 2 upon distributing this stock to A.

 
 

Sections 361(c)(2)(A) Ex. 2, (B)(i) Ex. 1

 
 
 
 

Assumptions:  Classes A and B are both common, but Class A votes, Class B does not.  The bond given up by B has a face and FMV of 10 as does the bond received.  But, the bond received has a term of 20 years, replacing the prior bond with a remaining life of 10 years.

 

Treatment:  The transaction is a recapitalization and, therefore, a reorganization.  368(a)(1)(E).  X does not recognize gain on the distribution of its stock or its bond (361(c)(2)(A)) because both are qualified property. 361(c)(2)(B)(i).

 

 
 
 (B) Qualified property
 For purposes of this subsection, the term ''qualified
 property'' means -
 (i) any stock in (or right to acquire stock in) the
 distributing corporation or obligation of the distributing
 corporation, or
 

Sections 361(c)(2)(A) Ex. 2, (B)(i) Ex. 1

 
 
 
 

Assumptions:  Classes A and B are both common, but Class A votes, Class B does not.  The bond given up by B has a face and FMV of 10 as does the bond received.  But, the bond received has a term of 20 years, replacing the prior bond with a remaining life of 10 years.

 

Treatment:  The transaction is a recapitalization and, therefore, a reorganization.  368(a)(1)(E).  X does not recognize gain on the distribution of its stock or its bond (361(c)(2)(A)) because both are qualified property. 361(c)(2)(B)(i).

 

 
 (ii) any stock in (or right to acquire stock in) another
 corporation which is a party to the reorganization or
 obligation of another corporation which is such a party if
 such stock (or right) or obligation is received by the
 distributing corporation in the exchange.
 
 
 

Sections 361(c)(2)(A) Ex.1, (B)(ii) Ex. 1

 
 
 

Treatment:  The transaction is a C reorganization.  368(a)(1)(C).  T will recognize a gain of 2 upon the distribution of Marketable Stock 1, but will not recognize loss on the distribution of Marketable Stock 2.  T also does not recognize gain on distribution of the P stock.  361(c)(1) generally provides no gain or loss recognition on a distribution to shareholders pursuant to a reorganization.  But, 361(c)(2)(A) provides an exception where the corporation distributes appreciated property other than qualified property.  Because Marketable Stock 1 is not appreciated property, 361(c)(2) does not apply, 361(c)(1) does, and hence, T does not recognize this loss.  Qualified property includes stock of another corporation (i.e., other than the distributing corporation) a party to the reorganization received in the exchange (361(c)(2)(B)(ii)) - here, the P stock is qualified property, and hence, T does not recognize gain or loss when distributing this stock.  Marketable Stock 2 is appreciated property which is not qualified property, and so T does recognize its gain of 2 upon distributing this stock to A.

 
 

Section 361(c)(2)(B)(ii) Ex. 2

 
 
 

Treatment:  The transaction is a C reorganization.  368(a)(1)(C).  T recognizes neither gain nor loss on the distribution of P warrants received frm P in the exchange.  361(c)(2)(B)(ii).  A will, however, treat the warrants as boot received, triggering recognition of realized gain (but not loss) up to $10.  356(a)(1).

 
 
 
 (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 361(c)(2)(C)

 
 
 

Assumptions:  The mortgage on T's land is assumable and this mortgage is transferred with the land to A upon T's liquidation pursuant to the plan of reorganization.

 

Treatment:  When a corporation distributes appreciated property pursuant to a reorganization, it recognizes gain as if it sold the property at its FMV.  361(c)(2)(A).  While FMV is normally just that - FMV - if property is subject to a liability (or the shareholders assume a liability) greater than FMV, then the FMV (including for purposes of determining whether an asset is appreciated) will be deemed to be not less than the liability.  361(c)(2)(C).  Here, T will recognize a gain of 15 = AR 25 - AB 10.

 

 
 
 
 (3) Treatment of certain transfers to creditors
 For purposes of this subsection, any transfer of qualified
 property by the corporation to its creditors in connection with
 the reorganization shall be treated as a distribution to its
 shareholders pursuant to the plan of reorganization.
 
 

Sections 361(a) Ex. 2, (c)(3)

 
 
 
 

Assumptions:  T transfers the P stock and the marketable stock to B pursuant to a plan of reorganization.

 

Treatment:  The transaction is a C reorganization.  368(a)(1)(C).  T does not recognize gain or loss on the exchange with P because all assets are exchanged solely for voting stock of P.  361(a).  T does not recognize gain or loss on the distribution of P stock to A.  361(c)(1) & (2).  Similarly, T does not recognize gain on the distribution of P stock to creditor B because distributions of qualified property to creditors are treated the same as though distributed to shareholders for this purpose.  361(c)(2)(B) & (3).  T will recognize its realized gain of 2 on the transfer of land to B.

 

 
 
 (4) Coordination with other provisions
 Section 311 and subpart B of part II of this subchapter shall
 not apply to any distribution referred to in paragraph (1).
 

Sections 336(c), 361(c)(4) Ex. 1

 
 

Assumption: A plan of reorganization exists.

 

Treatment: The transaction is a C reorganization. 368(1)(1)(C). Even though T liquidates pursuant to the transaction, the liquidation provisions (e.g., 336) do not apply and the distribution provisions (e.g., 311) likewise do not apply to T. 336, 361(c)(4). Instead, Ts tax treatment will be governed by 361 which will provide that T does not recognize gain or loss.

 
 

Sections 368(a)(1)(C) Ex. 1, 354(a)(1) Ex. 1, 358(a)(1) Ex. 7, 361(a) Ex.1, (c)(1) Ex. 2, (c)(4) Ex. 2, 362(b) Ex. 5,

381(a) Ex. 1, (c)(1) Ex. 1, (c)(2) Ex. 3, 1032(a) Ex. 1, 1223(1) Ex. 1, (2) Ex. 1

 

 

Treatment:  The transaction is a C reorganization. 368(a)(1)(C).  T does not recognize gain or loss on the exchange of its assets for P stock.  361(a).  T also does not recognize gain or loss on the distribution of the P voting stock under 361(c)(1) and 336 does not apply to T.  361(c)(4).  P does not recognize gain on the use of its P stock.  1032(a).  A recognizes none of the realized gain of 200 (300 - 100), because A has received solely stock or securities of another party to the reorganization in exchange for stock or securities of a party to the reorganization.  354(a)(1).  A's basis in the stock received will equal 100, A's basis in the T stock surrendered.  358(a)(1).  A's holding period in the P stock will include A's holding period in the T stock.  1223(1).  P's bases in the T assets received will equal T's 200 bases in those assets .  362(b).  P's holding period in those assets will include T's holding period.  1223(2).  P will succeed to certain T attributes, including T's NOL carryover (subject to possible limitations) and T's E&P.  381(a), (c)(1) & (2).

 

 
 
 
 (5) Cross reference
 For provision providing for recognition of gain in certain
 distributions, see section 355(d).
 

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.