26 U.S.C. § 356

Receipt of additional consideration

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(a) Gain on exchanges(1) Recognition of gainIf—(A) section 354 or 355 would apply to an exchange but for the fact that(B) the property received in the exchange consists not only of property permitted by section 354 or 355 to be received without the recognition of gain but also of other property or money,then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.(2) Treatment as dividend

If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend (determined with the application of section 318(a)), then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.

(b) Additional consideration received in certain distributionsIf—(1) section 355 would apply to a distribution but for the fact that(2) the property received in the distribution consists not only of property permitted by section 355 to be received without the recognition of gain, but also of other property or money,then an amount equal to the sum of such money and the fair market value of such other property shall be treated as a distribution of property to which section 301 applies.(c) LossIf—(1) section 354 would apply to an exchange or section 355 would apply to an exchange or distribution, but for the fact that(2) the property received in the exchange or distribution consists not only of property permitted by section 354 or 355 to be received without the recognition of gain or loss, but also of other property or money,then no loss from the exchange or distribution shall be recognized.(d) Securities as other propertyFor purposes of this section—(1) In general

Except as provided in paragraph (2), the term “other property” includes securities.

(2) Exceptions(A) Securities with respect to which nonrecognition of gain would be permitted

The term “other property” does not include securities to the extent that, under section 354 or 355, such securities would be permitted to be received without the recognition of gain.

(B) Greater principal amount in section 354 exchangeIf—(i) in an exchange described in section 354 (other than subsection (c) thereof), securities of a corporation a party to the reorganization are surrendered and securities of any corporation a party to the reorganization are received, and(ii) the principal amount of such securities received exceeds the principal amount of such securities surrendered,then, with respect to such securities received, the term “other property” means only the fair market value of such excess. For purposes of this subparagraph and subparagraph (C), if no securities are surrendered, the excess shall be the entire principal amount of the securities received.(C) Greater principal amount in section 355 transaction

If, in an exchange or distribution described in section 355, the principal amount of the securities in the controlled corporation which are received exceeds the principal amount of the securities in the distributing corporation which are surrendered, then, with respect to such securities received, the term “other property” means only the fair market value of such excess.

(e) Nonqualified preferred stock treated as other propertyFor purposes of this section—(1) In general

Except as provided in paragraph (2), the term “other property” includes nonqualified preferred stock (as defined in section 351(g)(2)).

(2) Exception

The term “other property” does not include nonqualified preferred stock (as so defined) to the extent that, under section 354 or 355, such preferred stock would be permitted to be received without the recognition of gain.

(f) Exchanges for section 306 stock

Notwithstanding any other provision of this section, to the extent that any of the other property (or money) is received in exchange for section 306 stock, an amount equal to the fair market value of such other property (or the amount of such money) shall be treated as a distribution of property to which section 301 applies.

(g) Transactions involving gift or compensationFor special rules for a transaction described in section 354, 355, or this section, but which—(1) results in a gift, see section 2501 and following, or(2) has the effect of the payment of compensation, see section 61(a)(1).(Aug. 16, 1954, ch. 736, 68A Stat. 115; Pub. L. 94–253, § 1(c), Mar. 31, 1976, 90 Stat. 296; Pub. L. 97–248, title II, § 227(b), Sept. 3, 1982, 96 Stat. 492; Pub. L. 101–508, title XI, § 11801(c)(8)(E), Nov. 5, 1990, 104 Stat. 1388–524; Pub. L. 105–34, title X, § 1014(d), Aug. 5, 1997, 111 Stat. 921.)Editorial NotesAmendments

1997—Subsecs. (e) to (g). Pub. L. 105–34 added subsec. (e) and redesignated former subsecs. (e) and (f) as (f) and (g), respectively.

1990—Subsec. (d)(2)(B)(i). Pub. L. 101–508 struck out “or (d)” after “subsection (c)”.

1982—Subsec. (a)(2). Pub. L. 97–248 inserted “(determined with the application of section 318(a))” after “distribution of a dividend”.

1976—Subsec. (d)(2)(B)(i). Pub. L. 94–253 substituted “subsection (c) or (d) thereof” for “subsection (c) thereof”.

Statutory Notes and Related SubsidiariesEffective Date of 1997 Amendment

Amendment by Pub. L. 105–34 applicable, with certain exceptions, to transactions after June 8, 1997, see section 1014(f) of Pub. L. 105–34, set out as a note under section 351 of this title.

Effective Date of 1982 Amendment

Pub. L. 97–248, title II, § 227(c)(2), Sept. 3, 1982, 96 Stat. 492, provided that: “The amendment made by subsection (b) [amending this section] shall apply to distributions after August 31, 1982, in taxable years ending after such date.”

Effective Date of 1976 Amendment

Amendment by Pub. L. 94–253 applicable to taxable years ending after Mar. 31, 1976, see section 2 of Pub. L. 94–253, set out as a note under section 354 of this title.

Savings Provision

For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title.

Notes of Decisions

Cited in 13 cases, 1932–1989 · leading case: Commissioner v. Clark

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Commissioner v. Clark (1989) scotus · cites it 7× “" 26 U. S. C. § 356 (a)(1). That is, if the shareholder receives boot, he or she must recognize the gain on the exchange up to the value of the boot.”

William F. And Gwendolyn Wright v. United States (1973) ca8 · cites it 5× “The question presented on this appeal is whether or not “boot”, in the form of a promissory note, received in connection with a corporate consolidation and reorganization is taxable as an ordinary dividend under 26 U.S.C. § 356 (a)(2) or as a distribution entitled to capital…”

Fed. Sec. L. Rep. P 95,887 Sundstrand Corporation v. Sun Chemical Corporation (1977) ca7 “The tax problem concerned the risk that any cash payment by Sundstrand to Huarisa (even mere reimbursement of his outlay to acquire the Burke stock) shortly before or after an otherwise tax-free merger between SKI and *1038 Sundstrand might be deemed to be taxable ‘boot’ to…”

Samuel Katkin and Doris Katkin v. Commissioner of Internal Revenue (1978) ca6 · cites it 2× “The taxpayers also contend that their right to receive additional shares must be treated as stock in Whittaker, since nonrecognition of gain or loss would have been forfeited if they had received “boot” or other property.”

Edmondson v. Allen-Russell Ford, Inc. (1978) ca5 · cites it 2× “The taxpayer contends that this “boot” should be taxed as a long-term capital gain, while the government argues that it has “the effect of the distribution of a dividend” within the meaning of 26 U.S.C. § 356 (a)(2) and should thus be taxed as ordinary income.”

Arden S. Heverly and Sophia S. Heverly v. Commissioner of Internal Revenue (1980) ca3 “” If a valid reorganization occurs, any consideration other than stock or securities received by shareholders is subject to recognition in the amount of the gain realized, but the gain recognized will not exceed the amount of nonstock consideration received.”

Donald E. Clark Peggy S. Clark v. Commissioner of Internal Revenue (1987) ca4 “” 26 U.S.C. § 356 (a)(1) (1982) (emphasis added).”

R. A. Babcock and Norma L. Babcock v. V. Lee Phillips (1967) ca10 “26 U.S.C. § 356 (a) provides: “(a) Gain on exchanges.”

Atlas Tool Co. v. Commissioner (1980) ca3 · cites it 2× “But if the transaction was a reorganization, the distribution by Fletcher to Schaffan would be covered by the “boot” provision of section 356, 26 U.S.C. § 356 (1976), and thus be treated as ordinary income rather than as a capital gain pursuant to section 331, 26 U.”

Mark E. Degroff and Loveta S. Degroff v. Commissioner of Internal Revenue (1971) ca10 “were received as liquidating distributions from that company or as part of a corporate reorganization with another corporation wholly owned by taxpayers and thus properly taxed as dividends under 26 U.S.C. § 356 (a) (2). The Tax Court found that there was a transfer of…”

Simon v. Commissioner (1981) ca5 · cites it 2× “§§ 356, 368, 26 U.S.C.A. §§ 356 , 368. The Government also imposed an accumulated earnings tax on Capital Sales, which was upheld by the Tax Court and is not contested on this appeal.”

Shimberg v. United States (1976) flmd “Section 356(a) of the Code, 26 U.S.C. § 356 (a), provides: “§ 356. Receipt of additional consideration (a) Gain on Exchanges.”

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