§356 Receipt of Additional Consideration

Summary

When a corporate reorganization or spin-off that would normally be tax-free under sections 354 or 355 also gives you extra cash or other property, you must report and pay tax on any gain up to the amount of that cash plus the market value of the extra property. If the deal really acts like a dividend (using the test in section 318(a)), then each recipient is treated as getting a dividend up to their share of the corporation’s undistributed earnings and profits accumulated after February 28, 1913; any remaining recognized gain is treated as gain from selling property. If a distribution would be tax-free under section 355 but you get extra cash or property, that extra amount is treated as a taxable distribution under section 301. You cannot claim a loss when extra cash or property is received. Securities generally count as “other property,” except those that would be allowed tax-free under sections 354 or 355. If the principal amount of securities received is larger than those given up, only the excess counts. Nonqualified preferred stock is treated like other property unless allowed tax-free under 354 or 355. If the extra stuff is received for section 306 stock, its value is treated as a section 301 distribution. Gifts or compensation from these transactions are handled under sections 2501 and 61(a)(1).