26 U.S.C. § 361 — Nonrecognition of gain or loss to corporations; treatment of distributions

(a) General rule
If a corporation^* is part of a "reorganization" (a specific kind of corporate restructuring) and swaps property solely for stock^* or securities^* in another corporation that's also part of the reorganization, the corporation does not have to recognize — meaning report and pay tax on — any gain or loss from that swap.

(b) Exchanges not solely in kind
(1) Gain: Suppose the swap would qualify under subsection (a), except that the corporation also received cash or other property (not just stock or securities) along with the tax-free stock. Then: (A) If the corporation passes that extra cash or property along to its own shareholders^* as part of the reorganization plan, the corporation still owes no tax on it. (B) But if the corporation keeps that extra cash or property instead of passing it on, the corporation must recognize gain — capped at the total value of the money and property it kept.
(2) Loss: In that same situation, the corporation cannot recognize any loss at all.
(3) Treatment of transfers to creditors: If the corporation gives that extra cash or property to its own creditors as part of the reorganization, that counts as "passing it on" for purposes of paragraph (1) — so gain is generally not recognized. The Secretary^* can write regulations to stop people from misusing this rule to avoid tax. In one specific case — a "type D" reorganization combined with a tax-free spin-off under section 355 — this creditor-transfer rule only shields the corporation up to the value of the assets transferred, reduced by any liabilities assumed.

(c) Treatment of distributions
(1) In general: Except as stated in paragraph (2), a corporation owes no tax when it distributes property to its shareholders as part of the reorganization plan.
(2) Distributions of appreciated property: (A) But if the corporation distributes property other than "qualified property" (defined below), and that property is worth more than its tax basis, the corporation must recognize gain — as if it had sold that property to the shareholder^* at full market value. (B) "Qualified property" means stock (or the right to buy stock) or debt of the distributing corporation itself, or of another corporation that's part of the same reorganization, if the distributing corporation received that stock or debt as part of the exchange. (C) If the distributed property comes with a debt attached, or the shareholder takes on a debt of the corporation as part of the deal, the property's market value (for purposes of (A)) is treated as at least equal to that debt.
(3) Transfers to creditors are again treated as distributions to shareholders for these purposes.
(4) This subsection overrides certain other distribution rules (section 311 and a related subpart), which don't apply here.
(5) Cross-reference: A related rule requiring gain recognition on certain distributions appears in section 355(d).