26 U.S.C. § 358 — Basis to distributees

(a) General rule: In an exchange covered by section 351, 354, 355, 356, or 361: (1) Nonrecognition property: For property received tax-free under one of those sections, its basis starts as the basis of what was given up. Then: (A) decrease that basis by (i) the fair market value of any other property (not money) also received, (ii) any money received, and (iii) any loss on the exchange that was recognized (taxed); and (B) increase that basis by (i) any amount treated as a dividend, and (ii) any recognized gain on the exchange, not counting the part treated as a dividend. (2) Other property: Any other property (not money) received gets a basis equal to its fair market value. (b) Allocating basis: (1) In general: Regulations set out how to split the basis found in (a)(1) among the different pieces of property received tax-free. (2) Special rule for section 355: In a section 355 spin-off (or the part of section 356 tied to section 355), when allocating basis you also count any stock or securities of the distributing company that were kept, not just the newly received property. Basis is allocated across all of them. (c) Section 355 transactions treated as exchanges: For this section, a section 355 distribution (or the linked part of section 356) is treated as an exchange. The stock and securities that were kept are treated as if they were handed in and received back as part of that exchange. (d) Assumption of liability: (1) In general: If, as part of the deal, the other party takes over one of the taxpayer's debts, that assumed debt counts as money received, for purposes of this section. (2) Exception: This doesn't apply to any debt amount excluded under section 357(c)(3). (e) Exception: This section does not apply to property a corporation gets by trading its own stock or securities (or those of a company that controls it) as some or all of the payment for the property. (f) Special definition for section 361 exchanges: For this section, tax-free property received under section 361 counts only as stock or securities in another corporation that's part of the reorganization. (g) Adjustments within a corporate group: In a section 355 spin-off (or linked section 356 distribution) between two members of the same affiliated group (as section 1504(a) defines it, ignoring subsection (b)), the Secretary may adjust the basis of stock held by one group member in another group member, to properly reflect the distribution. (h) Special rule when assumed debt isn't already counted as money: (1) In general: After applying the section's other rules, if the basis of property under (a)(1) is more than the property's fair market value, reduce that basis — but not below fair market value — by any debt that (A) someone else assumed as part of the exchange, and (B) wasn't already treated as money under (d)(1). (2) Exceptions: Unless the Secretary says otherwise, this reduction doesn't apply if (A) the whole trade or business tied to the debt is transferred to the person taking on the debt, or (B) substantially all the assets tied to the debt are transferred to that person. (3) Definition of "liability": For this rule, "liability" includes any fixed or contingent duty to pay, whether or not it's normally counted for other tax purposes.