26 U.S.C. § 354 — Exchanges of stock and securities in certain reorganizations

(a) General rule. (1) If a shareholder^* or bondholder trades their stock^* or securities^* in a company solely for stock or securities in that same company, or in another company that's also part of a qualifying reorganization, no gain or loss is recognized — meaning it isn't taxed at that time. (2) Limitation. (A) This tax-free treatment doesn't apply if the bonds received have a bigger principal amount than the bonds given up, or if bonds are received but none were given up at all. (B) It also doesn't apply to the part of anything received that represents interest that built up on the bonds since the holder acquired them — that piece is instead taxed as ordinary income under section 61. (C) "Nonqualified preferred stock" (a riskier type of preferred stock defined in section 351(g)(2)) is treated as taxable property, not tax-free stock or securities, when received in exchange for stock that wasn't already nonqualified preferred stock. This rule doesn't apply, though, to a recapitalization of a "family-owned corporation^*" under section 368(a)(1)(E) — generally a corporation that, with some special ownership-counting rules, has been family-controlled throughout an 8-year window around the recapitalization. If a corporation later stops qualifying as family-owned, the government gets an extra 3 years after being notified to assess back taxes, even overriding the normal deadline. (3) Cross references point to section 356 for taxing any property received that isn't allowed under this subsection, and to section 61 for taxing the accrued-interest portion described in paragraph (2)(B).

(b) Exception. (1) The tax-free rule in subsection (a) doesn't apply to an exchange that's part of a "divisive" reorganization (types D or G under section 368(a)(1)), unless (A) the receiving corporation acquires substantially all of the transferring corporation's assets, and (B) the transferring corporation distributes everything it received — the stock, securities, and other property — as part of the reorganization plan. (2) A cross-reference points to section 355 for the special rules that apply to these type-D and type-G reorganizations.

(c) Certain railroad reorganizations. This tax-free treatment also applies to a plan for reorganizing a railroad that a bankruptcy court confirmed under section 1173 of title 11 (the Bankruptcy Code) as being in the public interest — even if the plan wouldn't otherwise count as a "reorganization" under section 368(a).