26 U.S.C. § 356 — Receipt of additional consideration

Page 1133 TITLE 26—INTERNAL REVENUE CODE § 356 ‘‘(3) AMENDMENT RELATED TO SECTION 515 OF THE ACT.— The amendment made by subsection (c) [amending sec- tion 911 of this title] shall apply to taxable years begin- ning after December 31, 2006.’’ EFFECTIVE DATE OF 2006 AMENDMENT Pub. L. 109–432, div. A, title IV, § 410(b), Dec. 20, 2006, 120 Stat. 2963, provided that: ‘‘The amendments made by this section [amending this section] shall take effect as if included in section 202 of the Tax Increase Preven- tion and Reconciliation Act of 2005 [Pub. L. 109–222].’’ Pub. L. 109–222, title V, § 507(b), May 17, 2006, 120 Stat. 361, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section] shall apply to distribu- tions after the date of the enactment of this Act [May 17, 2006]. ‘‘(2) TRANSITION RULE.—The amendments made by this section shall not apply to any distribution pursu- ant to a transaction which is— ‘‘(A) made pursuant to an agreement which was binding on such date of enactment and at all times thereafter, ‘‘(B) described in a ruling request submitted to the Internal Revenue Service on or before such date, or ‘‘(C) described on or before such date in a public an- nouncement or in a filing with the Securities and Ex- change Commission.’’ EFFECTIVE DATE OF 1998 AMENDMENT Amendment by Pub. L. 105–206 effective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 6024 of Pub. L. 105–206, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Amendment by section 1012(a), (b)(1) of Pub. L. 105–34 applicable, with transition rule, to distributions after Apr. 16, 1997, except that amendment by section 1012(a) applicable to such distributions only if pursuant to a plan (or series of related transactions) which involves an acquisition described in subsec. (e)(2)(A)(ii) of this section occurring after such date, see section 1012(d) of Pub. L. 105–34, as amended, set out as a note under sec- tion 351 of this title. Amendment by section 1014(c), (e)(1), (2) of Pub. L. 105–34 applicable, with certain exceptions, to trans- actions after June 8, 1997, see section 1014(f) of Pub. L. 105–34, set out as a note under section 351 of this title. EFFECTIVE DATE OF 1990 AMENDMENT Pub. L. 101–508, title XI, § 11321(c), Nov. 5, 1990, 104 Stat. 1388–463, provided that: ‘‘(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section [amending this section and section 361 of this title] shall apply to distributions after October 9, 1990. ‘‘(2) BINDING CONTRACT EXCEPTION.—The amendments made by this section shall not apply to any distribu- tion pursuant to a written binding contract in effect on October 9, 1990, and at all times thereafter before such distribution. ‘‘(3) TRANSITIONAL RULES.—For purposes of subpara- graphs (A) and (B) of section 355(d)(3) of the Internal Revenue Code of 1986 (as amended by subsection (a)), an acquisition shall be treated as occurring on or before October 9, 1990, if— ‘‘(A) such acquisition is pursuant to a written bind- ing contract in effect on October 9, 1990, and at all times thereafter before such acquisition, ‘‘(B) such acquisition is pursuant to a transaction which was described in documents filed with the Se- curities and Exchange Commission on or before Octo- ber 9, 1990, or ‘‘(C) such acquisition is pursuant to a transaction— ‘‘(i) the material terms of which were described in a written public announcement on or before Octo- ber 9, 1990, ‘‘(ii) which was the subject of a prior filing with the Securities and Exchange Commission, and ‘‘(iii) which is the subject of a subsequent filing with the Securities and Exchange Commission be- fore January 1, 1991.’’ Amendment by section 11702(e)(2) of Pub. L. 101–508 effective as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 11702(j) of Pub. L. 101–508, set out as a note under section 59 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by section 1018(d)(5)(C) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under sec- tion 1 of this title. Amendment by section 2004(k)(1) of Pub. L. 100–647 ef- fective, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100–647, set out as a note under section 56 of this title. EFFECTIVE DATE OF 1987 AMENDMENT Amendment by Pub. L. 100–203 applicable to distribu- tions or transfers after Dec. 15, 1987, with exceptions for certain distributee corporations and distributions cov- ered by prior transition rule, see section 10223(d) of Pub. L. 100–203, set out as a note under section 304 of this title. EFFECTIVE DATE OF 1980 AMENDMENT Amendment by Pub. L. 96–589 applicable to bank- ruptcy cases or similar judicial proceedings com- mencing after Dec. 31, 1980, and to exchanges which occur after Dec. 31, 1980, and which do not occur in a bankruptcy case or similar judicial proceeding or in a proceeding under Title 11, Bankruptcy, commenced on or before Dec. 31, 1980, with an exception permitting the debtor to make the amendment applicable to such cases, proceedings or exchanges commencing after Sept. 30, 1979, see section 7(c), (f) of Pub. L. 96–589, set out as a note under section 108 of this title. TERMINATION OF TAX INCREASE PREVENTION AND REC- ONCILIATION ACT OF 2005 AND TAX RELIEF AND HEALTH CARE ACT OF 2006 AMENDMENTS Pub. L. 110–172, § 4(b)(3), Dec. 29, 2007, 121 Stat. 2476, provided that: ‘‘The Internal Revenue Code of 1986 shall be applied and administered as if the amendments made by section 202 of the Tax Increase Prevention and Reconciliation Act of 2005 [Pub. L. 109–222, amending this section] and by section 410 of division A of the Tax Relief and Health Care Act of 2006 [Pub. L. 109–432, amending this section] had never been enacted.’’ § 356. Receipt of additional consideration (a) Gain on exchanges (1) Recognition of gain If— (A) section 354 or 355 would apply to an ex- change 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 prop- erty or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. (2) Treatment as dividend If an exchange is described in paragraph (1) but has the effect of the distribution of a divi- Page 1134 TITLE 26—INTERNAL REVENUE CODE § 356 dend (determined with the application of sec- tion 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 un- distributed earnings and profits of the cor- poration accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property. (b) Additional consideration received in certain distributions If— (1) section 355 would apply to a distribution but for the fact that (2) the property received in the distribution consists not only of property permitted by sec- tion 355 to be received without the recognition of gain, but also of other property or money, then an amount equal to the sum of such money and the fair market value of such other property shall be treated as a distribution of property to which section 301 applies. (c) Loss If— (1) section 354 would apply to an exchange or section 355 would apply to an exchange or dis- tribution, but for the fact that (2) the property received in the exchange or distribution consists not only of property per- mitted by section 354 or 355 to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange or distribution shall be recognized. (d) Securities as other property For purposes of this section— (1) In general Except as provided in paragraph (2), the term ‘‘other property’’ includes securities. (2) Exceptions (A) Securities with respect to which non- recognition of gain would be permitted The term ‘‘other property’’ does not in- clude securities to the extent that, under section 354 or 355, such securities would be permitted to be received without the rec- ognition of gain. (B) Greater principal amount in section 354 exchange If— (i) in an exchange described in section 354 (other than subsection (c) thereof), se- curities of a corporation a party to the re- organization are surrendered and securi- ties of any corporation a party to the reor- ganization are received, and (ii) the principal amount of such securi- ties received exceeds the principal amount of such securities surrendered, then, with respect to such securities re- ceived, the term ‘‘other property’’ means only the fair market value of such excess. For purposes of this subparagraph and sub- paragraph (C), if no securities are surren- dered, the excess shall be the entire prin- cipal amount of the securities received. (C) Greater principal amount in section 355 transaction If, in an exchange or distribution described in section 355, the principal amount of the securities in the controlled corporation which are received exceeds the principal amount of the securities in the distributing corporation which are surrendered, then, with respect to such securities received, the term ‘‘other property’’ means only the fair market value of such excess. (e) Nonqualified preferred stock treated as other property For purposes of this section— (1) In general Except as provided in paragraph (2), the term ‘‘other property’’ includes nonqualified preferred stock (as defined in section 351(g)(2)). (2) Exception The term ‘‘other property’’ does not include nonqualified preferred stock (as so defined) to the extent that, under section 354 or 355, such preferred stock would be permitted to be re- ceived without the recognition of gain. (f) Exchanges for section 306 stock Notwithstanding any other provision of this section, to the extent that any of the other property (or money) is received in exchange for section 306 stock, an amount equal to the fair market value of such other property (or the amount of such money) shall be treated as a dis- tribution of property to which section 301 ap- plies. (g) Transactions involving gift or compensation For special rules for a transaction described in sec- tion 354, 355, or this section, but which— (1) results in a gift, see section 2501 and following, or (2) has the effect of the payment of compensation, see section 61(a)(1). (Aug. 16, 1954, ch. 736, 68A Stat. 115; Pub. L. 94–253, § 1(c), Mar. 31, 1976, 90 Stat. 296; Pub. L. 97–248, title II, § 227(b), Sept. 3, 1982, 96 Stat. 492; Pub. L. 101–508, title XI, § 11801(c)(8)(E), Nov. 5, 1990, 104 Stat. 1388–524; Pub. L. 105–34, title X, § 1014(d), Aug. 5, 1997, 111 Stat. 921.) Editorial Notes AMENDMENTS 1997—Subsecs. (e) to (g). Pub. L. 105–34 added subsec. (e) and redesignated former subsecs. (e) and (f) as (f) and (g), respectively. 1990—Subsec. (d)(2)(B)(i). Pub. L. 101–508 struck out ‘‘or (d)’’ after ‘‘subsection (c)’’. 1982—Subsec. (a)(2). Pub. L. 97–248 inserted ‘‘(deter- mined with the application of section 318(a))’’ after ‘‘distribution of a dividend’’. 1976—Subsec. (d)(2)(B)(i). Pub. L. 94–253 substituted ‘‘subsection (c) or (d) thereof’’ for ‘‘subsection (c) there- of’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 applicable, with certain exceptions, to transactions after June 8, 1997, see sec- Page 1135 TITLE 26—INTERNAL REVENUE CODE § 357 tion 1014(f) of Pub. L. 105–34, set out as a note under section 351 of this title. EFFECTIVE DATE OF 1982 AMENDMENT Pub. L. 97–248, title II, § 227(c)(2), Sept. 3, 1982, 96 Stat. 492, provided that: ‘‘The amendment made by sub- section (b) [amending this section] shall apply to dis- tributions after August 31, 1982, in taxable years ending after such date.’’ EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94–253 applicable to taxable years ending after Mar. 31, 1976, see section 2 of Pub. L. 94–253, set out as a note under section 354 of this title. SAVINGS PROVISION For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liabil- ity for tax for periods ending after Nov. 5, 1990, see sec- tion 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. § 357. Assumption of liability (a) General rule Except as provided in subsections (b) and (c), if— (1) the taxpayer receives property which would be permitted to be received under sec- tion 351 or 361 without the recognition of gain if it were the sole consideration, and (2) as part of the consideration, another party to the exchange assumes a liability of the taxpayer, then such assumption shall not be treated as money or other property, and shall not prevent the exchange from being within the provisions of section 351 or 361, as the case may be. (b) Tax avoidance purpose (1) In general If, taking into consideration the nature of the liability and the circumstances in the light of which the arrangement for the as- sumption was made, it appears that the prin- cipal purpose of the taxpayer with respect to the assumption described in subsection (a)— (A) was a purpose to avoid Federal income tax on the exchange, or (B) if not such purpose, was not a bona fide business purpose, then such assumption (in the total amount of the liability assumed pursuant to such ex- change) shall, for purposes of section 351 or 361 (as the case may be), be considered as money received by the taxpayer on the exchange. (2) Burden of proof In any suit or proceeding where the burden is on the taxpayer to prove such assumption is not to be treated as money received by the taxpayer, such burden shall not be considered as sustained unless the taxpayer sustains such burden by the clear preponderance of the evi- dence. (c) Liabilities in excess of basis (1) In general In the case of an exchange— (A) to which section 351 applies, or (B) to which section 361 applies by reason of a plan of reorganization within the mean- ing of section 368(a)(1)(D) with respect to which stock or securities of the corporation to which the assets are transferred are dis- tributed in a transaction which qualifies under section 355, if the sum of the amount of the liabilities as- sumed exceeds the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a cap- ital asset or of property which is not a capital asset, as the case may be. (2) Exceptions Paragraph (1) shall not apply to any ex- change— (A) to which subsection (b)(1) of this sec- tion applies, or (B) which is pursuant to a plan of reorga- nization within the meaning of section 368(a)(1)(G) where no former shareholder of the transferor corporation receives any con- sideration for his stock. (3) Certain liabilities excluded (A) In general If a taxpayer transfers, in an exchange to which section 351 applies, a liability the pay- ment of which either— (i) would give rise to a deduction, or (ii) would be described in section 736(a), then, for purposes of paragraph (1), the amount of such liability shall be excluded in determining the amount of liabilities as- sumed. (B) Exception Subparagraph (A) shall not apply to any li- ability to the extent that the incurrence of the liability resulted in the creation of, or an increase in, the basis of any property. (d) Determination of amount of liability assumed (1) In general For purposes of this section, section 358(d), section 358(h), section 361(b)(3), section 362(d), section 368(a)(1)(C), and section 368(a)(2)(B), ex- cept as provided in regulations— (A) a recourse liability (or portion thereof) shall be treated as having been assumed if, as determined on the basis of all facts and circumstances, the transferee has agreed to, and is expected to, satisfy such liability (or portion), whether or not the transferor has been relieved of such liability; and (B) except to the extent provided in para- graph (2), a nonrecourse liability shall be treated as having been assumed by the transferee of any asset subject to such liabil- ity. (2) Exception for nonrecourse liability The amount of the nonrecourse liability treated as described in paragraph (1)(B) shall be reduced by the lesser of— (A) the amount of such liability which an owner of other assets not transferred to the transferee and also subject to such liability has agreed with the transferee to, and is ex- pected to, satisfy; or