§361 Nonrecognition of Gain or Loss to Corporations; Treatment of Distributions

Summary

When companies reorganize and one company swaps property only for stock or bonds of another company in the same reorganization, the swapping company usually does not have to report any taxable gain or loss. If the company also gets money or other property, then no gain is reported if that extra money or property is passed along under the reorganization plan. If the company keeps the extra money or property, it must report gain, but only up to the amount of the cash plus the fair market value of what it kept. If the exchange would otherwise produce a loss because other property or cash is involved, the loss is not allowed. Transfers of that extra money or property to the company’s creditors in connection with the reorganization are treated as if they were passed on under the plan. The tax official may make rules to stop abuse. A special rule limits this creditor treatment in one type of reorganizing deal tied to another tax rule, and it only applies up to the adjusted basis of assets transferred minus certain assumed liabilities. When a company distributes property to its shareholders under the reorganization plan, it normally has no gain or loss. But if it gives away property that is not “qualified property” and that property is worth more than its tax basis, the company must recognize gain as if it sold the property at market value. “Qualified property” means stock or a right to buy stock, or obligations (debts) of the distributing company, or stock or obligations the company received in the exchange. If distributed property has a liability or the shareholder takes on a liability, the property’s value for tax must be at least that liability amount. Transfers of qualified property to creditors count as distributions to shareholders. Certain other tax rules do not apply to these reorganization distributions, and another rule (section 355(d)) deals with some special cases.