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Title 26 — Internal Revenue CodeRelease 119-73not60

§356 Receipt of Additional Consideration

Title 26 › Subtitle 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 › § 356

Last updated Apr 5, 2026|Official source

Summary

If a corporate reorganization or distribution would normally be tax-free but the person getting the new property also gets other property or cash, some gain may have to be recognized. If the deal looks like a dividend under the rules that measure ownership, then the part of the gain that does not exceed each recipient’s share of the corporation’s undistributed earnings and profits accumulated after February 28, 1913 must be treated as a dividend. Any remaining gain is treated as gain from selling property. “Other property” usually includes securities and certain preferred stock, except when those securities or preferred shares could be received tax-free under the reorganization rules. If more securities are received than given, only the excess (measured by principal amount or fair market value as the rules say) counts as other property. If the other property was received in exchange for section 306 stock, its value is treated as a distribution under the rules for distributions. Special rules also apply if the transaction is really a gift or is really compensation.

Full Legal Text

Title 26, §356

Internal Revenue Code — Source: USLM XML via OLRC

(a)(1)If—
(A)section 354 or 355 would apply to an exchange 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 property or money,
(2)If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend (determined with the application of section 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 undistributed earnings and profits of the corporation 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)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 section 355 to be received without the recognition of gain, but also of other property or money,
(c)If—
(1)section 354 would apply to an exchange or section 355 would apply to an exchange or distribution, but for the fact that
(2)the property received in the exchange or distribution consists not only of property permitted by section 354 or 355 to be received without the recognition of gain or loss, but also of other property or money,
(d)For purposes of this section—
(1)Except as provided in paragraph (2), the term “other property” includes securities.
(2)(A)The term “other property” does not include securities to the extent that, under section 354 or 355, such securities would be permitted to be received without the recognition of gain.
(B)If—
(i)in an exchange described in section 354 (other than subsection (c) thereof), securities of a corporation a party to the reorganization are surrendered and securities of any corporation a party to the reorganization are received, and
(ii)the principal amount of such securities received exceeds the principal amount of such securities surrendered,
(C)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)For purposes of this section—
(1)Except as provided in paragraph (2), the term “other property” includes nonqualified preferred stock (as defined in section 351(g)(2)).
(2)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 received without the recognition of gain.
(f)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 distribution of property to which section 301 applies.
(g)For special rules for a transaction described in section 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).

Legislative History

Notes & Related Subsidiaries

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 “(determined 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) thereof”.

Statutory Notes and Related Subsidiaries

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 1982 Amendment Pub. L. 97–248, title II, § 227(c)(2), Sept. 3, 1982, 96 Stat. 492, provided that: “The amendment made by subsection (b) [amending this section] shall apply to distributions after August 31, 1982, in taxable years ending after such date.”

Effective Date

of 1976 AmendmentAmendment 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 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.

Reference

Citations & Metadata

Citation

26 U.S.C. § 356

Title 26 — Internal Revenue Code

Last Updated

Apr 5, 2026

Release point: 119-73not60