§356 Receipt of additional consideration

Summary

If a corporate reorganization or spin-off would normally be tax-free under section 354 or 355 but the shareholder also gets other property or cash, the shareholder must report some gain. If the deal looks like a dividend under the rules of section 318(a), then part of that gain—up to the shareholder’s share of the corporation’s undistributed earnings and profits accumulated after February 28, 1913—counts as a dividend. Any remaining gain is treated as gain from exchanging property. “Other property” generally includes securities and nonqualified preferred stock unless those items could be received tax-free under section 354 or 355. When securities are swapped and the principal amount received is more than that surrendered, only the excess is treated as other property and is valued at fair market value. If other property or cash is received in exchange for section 306 stock, its value is treated as a distribution under section 301. If the transaction results in a gift or is really compensation, the tax rules in sections 2501+ or 61(a)(1) apply.