§ 355. Distribution of stock and securities of a controlled corporation
(a)
Effect on distributees
(1)
General rule
If—
(A)
a corporation (referred to in this section as the “distributing corporation”)—
solely stock or securities of a corporation (referred to in this section as “controlled corporation”) which it controls immediately before 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),
(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.
(2)
Non pro rata distributions, etc.
Paragraph (1) shall be applied without regard to the following:
(3)
Limitations
(A)
Excess principal amount
Paragraph (1) shall not apply if—
(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—
shall not be treated as stock of such controlled corporation, but as other property.
(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.
(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.
(b)
Requirements as to active business
(1)
In general
Subsection (a) shall apply only if either—
(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—
(B)
such trade or business has been actively conducted throughout the 5-year period ending on the date of the distribution,
(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
(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.
(3)
Special rules for determining active conduct in the case of affiliated groups
(A)
In general
For purposes of determining whether a corporation meets the requirements of paragraph (2)(A), all members of such corporation’s separate affiliated group shall be treated as one corporation.
(C)
Treatment of trade or business conducted by acquired member
If a corporation became a member of a separate affiliated group as a result of one or more transactions in which gain or loss was recognized in whole or in part, any trade or business conducted by such corporation (at the time that such corporation became such a member) shall be treated for purposes of paragraph (2) as acquired in a transaction in which gain or loss was recognized in whole or in part.
(D)
Regulations
The Secretary shall prescribe such regulations as are necessary or appropriate to carry out the purposes of this paragraph, including regulations which provide for the proper application of subparagraphs (B), (C), and (D) of paragraph (2), and modify the application of subsection (a)(3)(B), in connection with the application of this paragraph.
(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.
(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.
(B)
Qualified property
For purposes of subparagraph (A), the term “qualified property” means any stock or securities in the controlled corporation.
(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.
(d)
Recognition of gain on certain distributions of stock or securities in controlled corporation
(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—
(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
(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—
(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—
(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—
(7)
Aggregation rules
(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—
(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—
(e)
Recognition of gain on certain distributions of stock or securities in connection with acquisitions
(2)
Distributions to which subsection applies
(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).
(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):
(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).
(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
(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,
(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—
(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—
(B)
Investment assets
(i)
In general
Except as otherwise provided in this subparagraph, the term “investment assets” means—
(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—
(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 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)
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.
(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 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—
(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