Title 26, Internal Revenue CodeRelease 119-110
§354 Exchanges of Stock and Securities in Certain Reorganizations
Title 26 › Subtitle A — Income Taxes › CHAPTER 1 — NORMAL TAXES AND SURTAXES › Subchapter C — Corporate Distributions and Adjustments › PART III — CORPORATE ORGANIZATIONS AND REORGANIZATIONS › Subpart B — Effects on Shareholders and Security Holders › § 354
Summary
If a corporation in a reorganization swaps stock or securities only for stock or securities of the same corporation or another corporation in the reorganization, you do not have to report a gain or loss on that exchange. The rule does not apply if the amount of securities you get has a larger principal amount than what you gave, or if you get securities without giving any. It also does not cover any part of the stuff you receive that is really unpaid interest that built up on the old securities after your holding period began. Preferred stock that meets the technical definition of “nonqualified preferred stock” is not treated as regular stock in these swaps, except for certain family-owned corporation recapitalizations under section 368(a)(1)(E). A “family-owned corporation” must meet a specific ownership test for an 8-year period that starts 5 years before the recapitalization. If a corporation later tells the IRS it failed that test, the agency has up to 3 years after that notice to assess any tax deficiency. The rule does not apply to exchanges under subparagraph (D) or (G) of section 368(a)(1) unless the receiving corporation gets substantially all the transferor’s assets and the transferor’s received stock, securities, and other property (and its other properties) are distributed under the plan. Special rules for disallowed property are in section 356, for accrued interest see section 61, and reorganizations of railroads confirmed under 11 U.S.C. 1173 are covered by the main no-gain/no-loss rule even if they are not reorganizations under section 368.
Full Legal Text
Title 26, §354
Internal Revenue Code, Source: USLM XML via OLRC
(a)General rule
(1)In general
No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
(2)Limitation
(A)Excess principal amount
Paragraph (1) shall not apply if—
(i)the principal amount of any such securities received exceeds the principal amount of any such securities surrendered, or
(ii)any such securities are received and no such securities are surrendered.
(B)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.
(C)Nonqualified preferred stock
(i)In general
Nonqualified preferred stock (as defined in section 351(g)(2)) received in exchange for stock other than nonqualified preferred stock (as so defined) shall not be treated as stock or securities.
(ii)Recapitalizations of family-owned corporations
(I)In general
Clause (i) shall not apply in the case of a recapitalization under section 368(a)(1)(E) of a family-owned corporation.
(II)Family-owned corporation
For purposes of this clause, except as provided in regulations, the term “family-owned corporation” means any corporation which is described in clause (i) of section 447(d)(2)(C) throughout the 8-year period beginning on the date which is 5 years before the date of the recapitalization. For purposes of the preceding sentence, stock shall not be treated as owned by a family member during any period described in section 355(d)(6)(B).
(III)Extension of statute of limitations
The statutory period for the assessment of any deficiency attributable to a corporation failing to be a family-owned corporation shall not expire before the expiration of 3 years after the date the Secretary is notified by the corporation (in such manner as the Secretary may prescribe) of such failure, and such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.
(3)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 (2)(B) applies), see section 356.
(B)For treatment of accrued interest in the case of an exchange described in paragraph (2)(B), see section 61.
(b)Exception
(1)In general
Subsection (a) shall not apply to an exchange in pursuance of a plan of reorganization within the meaning of subparagraph (D) or (G) of section 368(a)(1), unless—
(A)the corporation to which the assets are transferred acquires substantially all of the assets of the transferor of such assets; and
(B)the stock, securities, and other properties received by such transferor, as well as the other properties of such transferor, are distributed in pursuance of the plan of reorganization.
(2)Cross reference
For special rules for certain exchanges in pursuance of plans of reorganization within the meaning of subparagraph (D) or (G) of section 368(a)(1), see section 355.
(c)Certain railroad reorganizations
Notwithstanding any other provision of this subchapter, subsection (a)(1) (and so much of section 356 as relates to this section) shall apply with respect to a plan of reorganization (whether or not a reorganization within the meaning of section 368(a)) for a railroad confirmed under section 1173 of title 11 of the United States Code, as being in the public interest.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
References in Text
section 447(d), referred to in subsec. (a)(2)(C)(ii)(II), was repealed and provisions not relating to family-owned corporations were redesignated as section 447(d) by Pub. L. 115–97, title I, § 13102(a)(5)(C), Dec. 22, 2017, 131 Stat. 2103.
Amendments
1998—Subsec. (a)(2)(C)(ii)(III). Pub. L. 105–206 added subcl. (III). 1997—Subsec. (a)(2)(B). Pub. L. 105–34, § 1014(e)(1), inserted “(including nonqualified preferred stock, as defined in section 351(g)(2))” after “stock”. Subsec. (a)(2)(C). Pub. L. 105–34, § 1014(b), added subpar. (C). Subsec. (a)(3)(A). Pub. L. 105–34, § 1014(e)(2), inserted “nonqualified preferred stock and” after “subsection (including”. 1995—Subsec. (c). Pub. L. 104–88 struck out “or approved by the Interstate Commerce Commission under subchapter IV of chapter 113 of title 49,” after “Code,”. 1990—Subsec. (d). Pub. L. 101–508 struck out subsec. (d) “Exchanges under the final system plan for ConRail” which read as follows: “No gain or loss shall be recognized if stock or securities in a corporation are, in pursuance of an exchange to which paragraph (1) or (2) of section 374(c) applies, exchanged solely for stock of the Consolidated Rail Corporation, securities of such Corporation, certificates of value of the United States Railway Association, or any combination thereof.” 1980—Subsec. (a)(2). Pub. L. 96–589, § 4(e)(1), redesignated existing pars. (A) and (B) as par. (A)(i), (ii), and added par. (B). Subsec. (a)(3). Pub. L. 96–589, § 4(e)(1), designated existing provisions as subpar. (A), inserted provisions excluding property to which paragraph (2)(B) applies, and added subpar. (B). Subsec. (b). Pub. L. 96–589, § 4(h)(1), substituted “subparagraph (D) or (G) of section 368(a)(1)” for “section 368(a)(1)(D)”, wherever appearing. Subsec. (c). Pub. L. 96–589, § 6(i)(2), substituted “confirmed under section 1173 of title 11 of the United States Code, or approved by the Interstate Commerce Commission” for “approved by the Interstate Commerce Commission under section 77 of the Bankruptcy Act, or”. 1978—Subsec. (c). Pub. L. 95–473 substituted “subchapter IV of chapter 113 of title 49” for “section 20b of the Interstate Commerce Act”. 1976—Subsec. (d). Pub. L. 94–253 added subsec. (d).
Statutory Notes and Related Subsidiaries
Effective Date
of 1998 AmendmentAmendment 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 AmendmentAmendment by Pub. L. 105–34 applicable, with certain exceptions, to transactions 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 1995 AmendmentAmendment by Pub. L. 104–88 effective Jan. 1, 1996, see section 2 of Pub. L. 104–88, set out as an
Effective Date
note under section 1301 of Title 49, Transportation.
Effective Date
of 1980 AmendmentAmendment by section 4(e)(1) of Pub. L. 96–589 applicable to bankruptcy cases or similar judicial proceedings commencing 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. Amendment by section 4(h)(1) of Pub. L. 96–589 applicable to bankruptcy cases or similar judicial proceedings commencing after Dec. 31, 1980, with an exception permitting the debtor to make the amendment applicable to such cases or proceedings commencing after Sept. 30, 1979, see section 7(c)(1), (f) of Pub. L. 96–589, set out as a note under section 108 of this title. Amendment by section 6(i)(2) of Pub. L. 96–589 effective Oct. 1, 1979, but not applicable to any proceeding under Title 11 commenced before Oct. 1, 1979, see section 7(e) of Pub. L. 96–589, set out as a note under section 108 of this title.
Effective Date
of 1976 Amendment Pub. L. 94–253, § 2, Mar. 31, 1976, 90 Stat. 297, provided that: “The
Amendments
made by section 1 [amending this section and section 356, 358, and 374 of this title] shall apply to taxable years ending after March 31, 1976.”
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 liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. Abolition of United States Railway Association and
Transfer of Functions
United States Railway Association abolished effective Apr. 1, 1987, all powers, duties, rights, and obligations of Association relating to Consolidated Rail Corporation under Regional Rail Reorganization Act of 1973 (45 U.S.C. 701 et seq.) transferred to Secretary of Transportation on Jan. 1, 1987, and any securities of Corporation held by Association transferred to Secretary of Transportation on Oct. 21, 1986, see section 1341 of Title 45, Railroads.
Reference
Citations & Metadata
Citation
26 U.S.C. § 354
Title 26, Internal Revenue Code
Last Updated
Sep 23, 2026
Release point: 119-110