26 U.S.C. § 356 — Receipt of additional consideration

(a) Gain on exchanges (1) Recognition of gain: Sections 354 and 355 normally let a shareholder exchange stock tax-free in a reorganization or corporate spin-off. But if the property received includes not just that tax-free property, but also other property or money, then any gain the recipient has is recognized — though only up to the total of that money plus the fair market value of the other property. (2) Treatment as dividend: If such an exchange has the effect of a dividend (determined using the rules in section 318(a)), then each shareholder's recognized gain is treated as 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 the exchange of property instead. (b) Additional consideration received in certain distributions Section 355 normally lets a corporate spin-off happen without recognizing gain. But if the property received in the distribution includes not just that tax-free property, but also other property or money, then the value of that money plus the fair market value of the other property is treated as a property distribution under section 301 (which is generally taxed based on the corporation's earnings and profits). (c) Loss If an exchange or distribution would otherwise qualify under section 354, or under section 355, but the property received includes not just the tax-free property, but also other property or money, then no loss from that exchange or distribution can be recognized. (d) Securities as other property (1) In general: Except as stated in paragraph (2), the term "other property" includes securities. (2) Exceptions: (A) Securities with respect to which nonrecognition of gain would be permitted: "Other property" does not include securities that sections 354 or 355 would let a person receive without recognizing gain. (B) Greater principal amount in section 354 exchange: If, in a section 354 exchange (other than one under subsection (c) of that section), a party gives up securities of a corporation involved in the reorganization and receives securities of a party to the reorganization, and the principal amount received is greater than the principal amount given up, then "other property" means only the fair market value of that excess amount; if no securities were given up at all, the entire principal amount received counts as the excess. (C) Greater principal amount in section 355 transaction: The same rule applies to a section 355 exchange or distribution: if the principal amount of securities received from the controlled corporation exceeds the principal amount of securities given up in the distributing corporation, "other property" means only the fair market value of that excess. (e) Nonqualified preferred stock treated as other property (1) In general: Except as stated in paragraph (2), the term "other property" includes nonqualified preferred stock, as defined in section 351(g)(2). (2) Exception: "Other property" does not include nonqualified preferred stock that sections 354 or 355 would let a person receive without recognizing gain. (f) Exchanges for section 306 stock No matter what else this section says, if any of the other property (or money) is received in exchange for "section 306 stock" (a specially defined category of preferred stock), then the fair market value of that other property (or the amount of money) is treated as a property distribution under section 301. (g) Transactions involving gift or compensation For special rules that apply to a transaction described in section 354, 355, or this section that either (1) results in a gift — see section 2501 and the sections following it; or (2) has the effect of paying compensation — see section 61(a)(1).