APPENDIX A
Internal Revenue Code: Selected Sections
§ 108 Income from discharge of indebtedness
§ 312 Effect on earnings and profits
§ 331 Gain or loss to shareholders in corporate liquidations
§ 332 Complete liquidations of subsidiaries
§ 336 Gain or loss recognized on property distributed in complete liquidation
§ 337 Nonrecognition for property distributed to parent in complete liquidation of subsidiary
§ 338 Certain stock purchases treated as asset acquisitions
§ 351 Transfer to corporation controlled by transferor
§ 354 Exchanges of stock and securities in certain reorganizations
§ 355 Distribution of stock and securities of a controlled corporation
§ 356 Receipt of additional consideration
§ 357 Assumption of liability
§ 358 Basis to distributees
§ 361 Nonrecognition of gain or loss to corporations; treatment of distributions
§ 368 Definitions relating to corporate reorganizations
§ 381 Carryovers in certain corporate acquisitions
§ 382 Limitation on net operating loss carryforwards and certain built-in losses following ownership change
§ 383 Special limitations on certain excess credits, etc.
§ 384 Limitation on use of preacquisition losses to offset built-in gains
§ 1017 Discharge of indebtedness
§ 1398 Rules relating to individuals’ title 11 cases
§ 1399 No separate taxable entities for partnerships, corporations, etc.
§ 6103 Confidentiality and disclosure of returns and return information
SEC. 108. INCOME FROM DISCHARGE OF INDEBTEDNESS
(a) Exclusion from gross income.
(1) In general. Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—
(A) the discharge occurs in a title 11 case,
(B) the discharge occurs when the taxpayer is insolvent,
(C) the indebtedness discharged is qualified farm indebtedness, or
(D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness.
(2) Coordination of exclusions.
(A) Title 11 exclusion takes precedence. Subparagraphs (B), (C), and (D) of paragraph (1) shall not apply to a discharge which occurs in a title 11 case.
(B) Insolvency exclusion takes precedence over qualified farm exclusion and qualified real property business exclusion. Subparagraphs (C) and (D) of paragraph (1) shall not apply to a discharge to the extent the taxpayer is insolvent.
(3) Insolvency exclusion limited to amount of insolvency. In the case of a discharge to which paragraph (1)(B) applies, the amount excluded under paragraph (1)(B) shall not exceed the amount by which the taxpayer is insolvent.
(b) Reduction of tax attributes.
(1) In general. The amount excluded from gross income under subparagraph (A), (B), or (C) of subsection (a)(1) shall be applied to reduce the tax attributes of the taxpayer as provided in paragraph (2).
(2) Tax attributes affected; order of reduction. Except as provided in paragraph (5), the reduction referred to in paragraph (1) shall be made in the following tax attributes in the following order:
(A) NOL. Any net operating loss for the taxable year of the discharge, and any net operating loss carryover to such taxable year.
(B) General business credit. Any carryover to or from the taxable year of a discharge of an amount for purposes for determining the amount allowable as a credit under section 38 (relating to general business credit).
(C) Minimum tax credit. The amount of the minimum tax credit available under section 53(b) as of the beginning of the taxable year immediately following the taxable year of the discharge.
(D) Capital loss carryovers. Any net capital loss for the taxable year of the discharge, and any capital loss carryover to such taxable year under section 1212.
(E) Basis reduction.
(i) In general. The basis of the property of the taxpayer.
(ii) Cross reference. For provisions for making the reduction described in clause (i), see section 1017.
(F) Passive activity loss and credit carryovers. Any passive activity loss or credit carryover of the taxpayer under section 469(b) from the taxable year of the discharge.
(G) Foreign tax credit carryovers. Any carryover to or from the taxable year of the discharge for purposes of determining the amount of the credit allowable under section 27.
(3) Amount of reduction.
(A) In general. Except as provided in subparagraph (B), the reductions described in paragraph (2) shall be one dollar for each dollar excluded by subsection (a).
(B) Credit carryover reduction. The reductions described in subparagraphs (B), (C), and (G) shall be 33 ⅓ cents for each dollar excluded by subsection (a). The reduction described in subparagraph (F) in any passive activity credit carryover shall be 33 ⅓ cents for each dollar excluded by subsection (a).
(4) Ordering rules.
(A) Reductions made after determination of tax for year. The reductions described in paragraph (2) shall be made after the determination of the tax imposed by this chapter for the taxable year of the discharge.
(B) Reductions under subparagraph (A) or (D) of paragraph (2). The reductions described in subparagraph (A) or (D) of paragraph (2) (as the case may be) shall be made first in the loss for the taxable year of the discharge and then in the carryovers to such taxable year in the order of the taxable years from which each such carryover arose.
(C) Reductions under subparagraphs (B) and (G) of paragraph (2). The reductions described in subparagraphs (B) and (G) of paragraph (2) shall be made in the order in which carryovers are taken into account under this chapter for the taxable year of the discharge.
(5) Election to apply reduction first against depreciable property.
(A) In general. The taxpayer may elect to apply any portion of the reduction referred to in paragraph (1) to the reduction under section 1017 of the basis of the depreciable property of the taxpayer.
(B) Limitation. The amount to which an election under subparagraph (A) applies shall not exceed the aggregate adjusted bases of the depreciable property held by the taxpayer as of the beginning of the taxable year following the taxable year in which the discharge occurs. (C) Other tax attributes not reduced. Paragraph (2) shall not apply to any amount to which an election under this paragraph applies.
(c) Treatment of discharge of qualified real property business indebtedness.
(1) Basis reduction.
(A) In general. The amount excluded from gross income under subparagraph (D) of subsection (a)(1) shall be applied to reduce the basis of the depreciable real property of the taxpayer.
(B) Cross reference. For provisions making the reduction described in subparagraph (A), see section 1017.
(2) Limitations.
(A) Indebtedness in excess of value. The amount excluded under subparagraph (D) of subsection (a)(1) with respect to any qualified real property business indebtedness shall not exceed the excess (if any) of—
(i) the outstanding principal amount of such indebtedness (immediately before the discharge), over
(ii) the fair market value of the real property described in paragraph (3)(A) (as of such time), reduced by the outstanding principal amount of any other qualified real property business indebtedness secured by such property (as of such time).
(B) Overall limitation. The amount excluded under subparagraph (D) of subsection (a)(1) shall not exceed the aggregate adjusted bases of depreciable real property (determined after any reductions under subsections (b) and (g)) held by the taxpayer immediately before the discharge (other than depreciable real property acquired in contemplation of such discharge).
(3) Qualified real property business indebtedness. The term “qualified real property business indebtedness” means indebtedness which—
(A) was incurred or assumed by the taxpayer in connection with real property used in a trade or business and is secured by such real property,
(B) was incurred or assumed before January 1, 1993, or if incurred or assumed on or after such date, is qualified acquisition indebtedness, and
(C) with respect to which such taxpayer makes an election to have this paragraph apply. Such term shall not include qualified farm indebtedness. Indebtedness under subparagraph (B) shall include indebtedness resulting from the refinancing of indebtedness under subparagraph (B) (or this sentence), but only to the extent it does not exceed the amount of the indebtedness being refinanced.
(4) Qualified acquisition indebtedness. For purposes of paragraph (3)(B), the term “qualified acquisition indebtedness” means, with respect to any real property described in paragraph (3)(A), indebtedness incurred or assumed to acquire, construct, reconstruct, or substantially improve such property.
(5) Regulations. The Secretary shall issue such regulations as are necessary to carry out this subsection, including regulations preventing the abuse of this subsection through cross-collateralization or other means.
(d) Meaning of terms; special rules relating to certain provisions.
(1) Indebtedness of taxpayer. For purposes of this section, the term “indebtedness of the tax payer” means any indebtedness—
(A) for which the taxpayer is liable, or
(B) subject to which the taxpayer holds property.
(2) Title 11 case. For purposes of this section, the term “title 11 case” means a case under title 11 of the United States Code (relating to bankruptcy), but only if the taxpayer is under the jurisdiction of the court in such case and the discharge of indebtedness is granted by the court or is pursuant to a plan approved by the court.
(3) Insolvent. For purposes of this section, the term “insolvent” means the excess of liabilities over the fair market value of assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the amount by which the taxpayer is insolvent, shall be determined on the basis of the taxpayer’s assets and liabilities immediately before the discharge.
(4) Repealed.
(5) Depreciable property. The term “depreciable property” has the same meaning as when used in section 1017.
(6) Certain provisions to be applied at partner level. In the case of a partnership, subsections (a), (b), (c), and (g) shall be applied at the partner level.
(7) Special rules for S corporation.
(A) Certain provisions to be applied at corporate level. In the case of an S corporation, subsections (a), (b), (c), and (g) shall be applied at the corporate level, including by not taking into account under section 1366(a) any amount excluded under subsection (a) of this section.
(B) Reduction in carryover of disallowed losses and deductions. In the case of an S corporation, for purposes of subparagraph (A) of subsection (b)(2), any loss or deduction which is disallowed for the taxable year of the discharge under section 1366(d)(1) shall be treated as a net operating loss for such taxable year. The preceding sentence shall not apply to any discharge to the extent that subsection (a)(1)(D) applies to such discharge.
(C) Coordination with basis adjustments under section 1367(b)(2). For purposes of subsection (e)(6), a shareholder’s adjusted basis in indebtedness of an S corporation shall be determined without regard to any adjustments made under section 1367(b)(2).
(8) Reductions of tax attributes in title 11 cases of individuals to be made by estate. In any case under chapter 7 or 11 of title 11 of the United States Code [11 USCS §§ 701 et seq. or 1101 et seq.] to which section 1398 applies, for purposes of paragraphs (1) and (5) of subsection (b) the estate (and not the individual) shall be treated as the taxpayer. The preceding sentence shall not apply for purposes of applying section 1017 to property transferred by the estate to the individual.
(9) Time for making election, etc.
(A) Time. An election under paragraph (5) of subsection (b) or under paragraph (3)(C) of subsection (c) shall be made on the taxpayer’s return for the taxable year in which the discharge occurs or at such other time as may be permitted in regulations prescribed by the Secretary.
(B) Revocation only with consent. An election referred to in subparagraph (A), once made, may be revoked only with the consent of the Secretary.
(C) Manner. An election referred to in subparagraph (A) shall be made in such manner as the Secretary may by regulations prescribe.
(10) Cross reference. For provision that no reduction is to be made in the basis of exempt property of an individual debtor, see section 1017(c)(1).
(e) General rules for discharge of indebtedness (including discharges not in title 11 cases or insolvency). For purposes of this title—
(1) No other insolvency exception. Except as otherwise provided in this section, there shall be no insolvency exception from the general rule that gross income includes income from the discharge of indebtedness.
(2) Income not realized to extent of lost deductions. No income shall be realized from the discharge of indebtedness to the extent that payment of the liability would have given rise to a deduction.
(3) Adjustments for unamortized premium and discount. The amount taken into account with respect to any discharge shall be properly adjusted for unamortized premium and unamortized discount with respect to the indebtedness discharged.
(4) Acquisition of indebtedness by person related to debtor.
(A) Treated as acquisition by debtor. For purposes of determining income of the debtor from discharge of indebtedness, to the extent provided in regulations prescribed by the Secretary, the acquisition of outstanding indebtedness by a person bearing a relationship to the debtor specified in section 267(b) or 707(b)(1) from a person who does not bear such a relationship to the debtor shall be treated as the acquisition of such indebtedness by the debtor. Such regulations shall provide for such adjustments in the treatment of any subsequent transactions involving the indebtedness as may be appropriate by reason of the application of the preceding sentence.
(B) Members of family. For purposes of this paragraph, sections 267(b) and 707(b)(1) shall be applied as if section 267(c)(4) provided that the family of an individual consists of the individual’s spouse, the individual’s children, grandchildren, and parents, and any spouse of the individual’s children or grandchildren.
(C) Entities under common control treated as related. For purposes of this paragraph, two entities which are treated as a single employer under subsection (b) or (c) of section 414 shall be treated as bearing a relationship to each other which is described in section 267(b).
(5) Purchase-money debt reduction for solvent debtor treated as price reduction. If—
(A) the debt of a purchaser of property to the seller of such property which arose out of the purchase of such property is reduced,
(B) such reduction does not occur—
(i) in a title 11 case, or
(ii) when the purchaser is insolvent, and
(C) but for this paragraph, such reduction would be treated as income to the purchaser from the discharge of indebtedness, then such reduction shall be treated as a purchase price adjustment.
(6) Indebtedness contributed to capital. Except as provided in regulations, for purposes of determining income of the debtor from discharge of indebtedness, if a debtor corporation acquires its indebtedness from a shareholder as a contribution to capital—
(A) section 118 shall not apply, but
(B) such corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the shareholder’s adjusted basis in the indebtedness.
(7) Recapture of gain on subsequent sale of stock.
(A) In general. If a creditor acquires stock of a debtor corporation in satisfaction of such corporation’s indebtedness, for purposes of section 1245—
(i) such stock (and any other property the basis of which is determined in whole or in part by reference to the adjusted basis of such stock) shall be treated as section 1245 property,
(ii) the aggregate amount allowed to the creditor—
(I) as deductions under subsection (a) or (b) of section 166 (by reason of the worthlessness or partial worthlessness of the indebtedness), or
(II) as an ordinary loss on the exchange, shall be treated as an amount allowed as a deduction for depreciation, and
(iii) an exchange of such stock qualifying under section 354(a), 355(a), or 356(a) shall be treated as an exchange to which section 1245(b)(3) applies. The amount determined under clause (ii) shall be reduced by the amount (if any) included in the creditor’s gross income on the exchange.
(B) Special rule for cash basis taxpayers. In the case of any creditor who computes his taxable income under the cash receipts and disbursements method, proper adjustment shall be made in the amount taken into account under clause (ii) of subparagraph (A) for any amount which was not included in the creditor’s gross income but which would have been included in such gross income if such indebtedness had been satisfied in full.
(C) Stock of parent corporation. For purposes of this paragraph, stock of a corporation in control (within the meaning of section 368(c)) of the debtor corporation shall be treated as stock of the debtor corporation.
(D) Treatment of successor corporation. For purposes of this paragraph, the term “debtor corporation” includes a successor corporation.
(E) Partnership rule. Under regulations prescribed by the Secretary, rules similar to the rules of the foregoing subparagraphs of this paragraph shall apply with respect to the indebtedness of a partnership.
(8) Indebtedness satisfied by corporation’s stock. For purposes of determining income of a debtor from discharge of indebtedness, if a debtor corporation transfers stock to a creditor in satisfaction of its indebtedness, such corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the fair market value of the stock.
(9) Discharge of indebtedness income not taken into account in determining whether entity meets REIT qualifications. Any amount included in gross income by reason of the discharge of indebtedness shall not be taken into account for purposes of paragraphs (2) and (3) of section 856(c).
(10) Indebtedness satisfied by issuance of debt instrument.
(A) In general. For purposes of determining income of a debtor from discharge of indebtedness, if a debtor issues a debt instrument in satisfaction of indebtedness, such debtor shall be treated as having satisfied the indebtedness with an amount of money equal to the issue price of such debt instrument.
(B) Issue price. For purposes of subparagraph (A), the issue price of any debt instrument shall be determined under sections 1273 and 1274. For purposes of the preceding sentence, section 1273(b)(4) shall be applied by reducing the stated redemption price of any instrument by the portion of such stated redemption price which is treated as interest for purposes of this chapter.
(11) [Redesignated]
(f) Student loans.
(1) In general. In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.
(2) Student loan. For purposes of this subsection, the term “student loan” means any loan to an individual to assist the individual in attending an educational organization described in section 170(b)(1)(A)(ii) made by—
(A) the United States, or an instrumentality or agency thereof,
(B) a State, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof,
(C) a public benefit corporation—
(i) which is exempt from taxation under section 501(c)(3),
(ii) which has assumed control over a State, county, or municipal hospital, and
(iii) whose employees have been deemed to be public employees under State law, or
(D) any educational organization described in section 170(b)(1)(A)(ii) if such loan is made—
(i) pursuant to an agreement with any entity described in subparagraph (A), (B), or (C) under which the funds from which the loan was made were provided to such educational organization, or
(ii) pursuant to a program of such educational organization which is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in section 501(c)(3) and exempt from tax under section 501(a).
The term “student loan” includes any loan made by an educational organization described in section 170(b)(1)(A)(ii) or by an organization exempt from tax under section 501(a) to refinance a loan to an individual to assist the individual in attending any such educational organization but only if the refinancing loan is pursuant to a program of the refinancing organization which is designed as described in subparagraph (D)(ii).
(3) Exception for discharges on account of services performed for certain lenders. Paragraph (1) shall not apply to the discharge of a loan made by an organization described in paragraph (2)(D) if the discharge is on account of services performed for either such organization.
(g) Special rules for discharge of qualified farm indebtedness.
(1) Discharge must be by qualified person.
(A) In general. Subparagraph (C) of subsection (a)(1) shall apply only if the discharge is by a qualified person.
(B) Qualified person. For purposes of subparagraph (A), the term “qualified person” has the meaning given to such term by section 49(a)(1)(D)(iv); except that such term shall include any Federal, State, or local government or agency or instrumentality thereof.
(2) Qualified farm indebtedness. For purposes of this section, indebtedness of a taxpayer shall be treated as qualified farm indebtedness if—
(A) such indebtedness was incurred directly in connection with the operation by the taxpayer of the trade or business of farming, and
(B) 50 percent or more of the aggregate gross receipts of the taxpayer for the 3 taxable years preceding the taxable year in which the discharge of such indebtedness occurs is attributable to the trade or business of farming.
(3) Amount excluded cannot exceed sum of tax attributes and business and investment assets.
(A) In general. The amount excluded under subparagraph (C) of subsection (a)(1) shall not exceed the sum of—
(i) the adjusted tax attributes of the taxpayer, and
(ii) the aggregate adjusted bases of qualified property held by the taxpayer as of the beginning of the taxable year following the taxable year in which the discharge occurs.
(B) Adjusted tax attributes. For purposes of subparagraph (A), the term “adjusted tax attributes” means the sum of the tax attributes described in subparagraphs (A), (B), (C), (D), (F), and (G) of subsection (b)(2) determined by taking into account $3 for each $1 of the attributes described in subparagraphs (B), (C), and (G) of subsection (b)(2) and the attribute described in subparagraph (F) of subsection (b)(2) to the extent attributable to any passive activity credit carryover.
(C) Qualified property. For purposes of this paragraph, the term “qualified property” means any property which is used or is held for use in a trade or business or for the production of income.
(D) Coordination with insolvency exclusion. For purposes of this paragraph, the adjusted basis of any qualified property and the amount of the adjusted tax attributes shall be determined after any reduction under subsection (b) by reason of amounts excluded from gross income under subsection (a)(1)(B).
SEC. 312. EFFECT ON EARNINGS AND PROFITS
(1) Discharge of Indebtedness Income.
(1) Does not increase earnings and profits if applied to reduce basis. The earnings and profits of a corporation shall not include from the discharge of indebtedness to the extent of the amount applied to reduce basis under section 1017.
(2) Reduction of deficit in earnings and profits in certain cases. If
(A) the interest of any shareholder of a corporation is terminated or extinguished in a title 11 or similar case (within the meaning of section 368(a)(3)(A)), and
(B) there is a deficit in the earnings and profits of the corporation, then such deficit shall be reduced by an amount equal to the paid-in capital which is allocable to the interest of the shareholder which is so terminated or extinguished.
SEC. 331. GAIN OR LOSS TO SHAREHOLDERS IN CORPORATE LIQUIDATIONS
(a) Distributions in Complete Liquidation Treated as Exchanges. Amounts received by a shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.
(b) Nonapplication of Section 301. Section 301 (relating to effects on shareholder of distributions of property) shall not apply to any distribution of property (other than a distribution referred to in paragraph (2)(B) of section 316(b)), in complete liquidation.
(c) Cross Reference.
For general rule for determination of the amount of gain or loss recognized, see section 1001.
SEC. 332. COMPLETE LIQUIDATIONS OF SUBSIDIARIES
(a) General rule. No gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation.
(b) Liquidations to which section applies. For purposes of this section, a distribution shall be considered to be in complete liquidation only if—
(1) the corporation receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock (in such other corporation) meeting the requirements of section 1504(a)(2); and either
(2) the distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corporation in complete cancellation or redemption of all its stock shall be considered an adoption of a plan of liquidation, even though no time for the completion of the transfer of the property is specified in such resolution; or
(3) such distribution is one of a series of distributions by such other corporation in complete cancellation or redemption of all its stock in accordance with a plan of liquidation under which the transfer of all the property under the liquidation is to be completed within 3 years from the close of the taxable year during which is made the first of the series of distributions under the plan, except that if such transfer is not completed within such period, or if the taxpayer does not continue qualified under paragraph (1) until the completion of such transfer, no distribution under the plan shall be considered a distribution in complete liquidation.
If such transfer of all the property does not occur within the taxable year, the Secretary may require of the taxpayer such bond, or waiver of the statute of limitations on assessment and collection, or both, as he may deem necessary to insure, if the transfer of the property is not completed within such 3-year period, or if the taxpayer does not continue qualified under paragraph (1) until the completion of such transfer, the assessment and collection of all income taxes then imposed by law for such taxable year or subsequent taxable years, to the extent attributable to property so received. A distribution otherwise constituting a distribution in complete liquidation within the meaning of this subsection shall not be considered as not constituting such a distribution merely because it does not constitute a distribution or liquidation within the meaning of the corporate law under which the distribution is made; and for purposes of this subsection a transfer of property of such other corporation to the taxpayer shall not be considered as not constituting a distribution (or one of a series of distributions) in complete cancellation or redemption of all the stock of such other corporation, merely because the carrying out of the plan involves (A) the transfer under the plan to the taxpayer by such other corporation of property, not attributable to shares owned by the taxpayer, on an exchange described in section 361, and (B) the complete cancellation or redemption under the plan, as a result of exchanges described in section 354, of the shares not owned by the taxpayer.
(c) Deductible liquidating distributions of regulated investment companies and real estate investment trusts. If a corporation receives a distribution from a regulated investment company or a real estate investment trust which is considered under subsection (b) as being in complete liquidation of such company or trust, then, notwithstanding any other provision of this chapter, such corporation shall recognize and treat as a dividend from such company or trust an amount equal to the deduction for dividends paid allowable to such company or trust by reason of such distribution.
SEC. 336. GAIN OR LOSS RECOGNIZED ON PROPERTY DISTRIBUTED IN COMPLETE LIQUIDATION
(a) General Rule. Except as otherwise provided in this section or section 337, gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property were sold to the distributee at its fair market value.
(b) Treatment of Liabilities. If any property distributed in the liquidation is subject to a liability or the shareholder assumes a liability of the liquidating corporation in connection with the distribution, for purposes of subsection (a) and section 337, the fair market value of such property shall be treated as not less than the amount of such liability.
(c) Exception for Liquidations Which Are Part of a Reorganization. For provision providing that this subpart does not apply to distributions in pursuance of a plan of reorganization, see section 361(c)(4).
(d) Limitations on Recognition of Loss.
(1) No loss recognized in certain distributions to related persons.
(A) In general. No loss shall be recognized to a liquidating corporation on the distributionof any property to a related person (within the meaning of section 267) if
(i) such distribution is not pro rata, or
(ii) such property is disqualified property.
(B) Disqualified property. For purposes of subparagraph (A), the term “disqualified property” means any property, which is acquired by the liquidating corporation in a transaction to which section 351 applied, or as a contribution to capital, during the 5-year period ending on the date of the distribution. Such term includes any property if the adjusted basis of such property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence.
(2) Special rule for certain property acquired in certain carryover basis transactions.
(A) In general. For purposes of determining the amount of loss recognized by any liquidating corporation on any sale, exchange, or distribution of property described in subparagraph (B), the adjusted basis of such property shall be reduced (but not below zero) by the excess (if any) of
(i) the adjusted basis of such property immediately after its acquisition by such corporation, over
(ii) the fair market value of such property as of such time.
(B) Description of property.
(i) In general. For purposes of subparagraph (A), property is described in this subparagraph if
(I) such property is acquired by the liquidating corporation in a transaction to which section 351 applied or as a contribution to capital, and
(II) the acquisition of such property by the liquidating corporation was part of a plan a principal purpose of which was to recognize loss by the liquidating corporation with respect to such property in connection with the liquidation.
Other property shall be treated as so described if the adjusted basis of such other property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence.
(ii) Certain acquisitions treated as part of plan. For purposes of clause (i), any property described in clause (i)(I) acquired by the liquidated corporation after the date 2 years before the date of the adoption of the plan of complete liquidation shall, except as provided in regulations, be treated as acquired as part of a plan described in clause (i)(II).
(C) Recapture in lieu of disallowance. The Secretary may prescribe regulations under which, in lieu of disallowing a loss under subparagraph (A) for a prior taxable year, the gross income of the liquidating corporation for the taxable year in which the plan of complete liquidation is adopted shall be increased by the amount of the disallowed loss.
(3) Special rule in case of liquidation to which section 332 applies. In the case of any liquidation to which section 332 applies, no loss shall be recognized to the liquidating corporation on any distribution in such liquidation. The preceding sentence shall apply to any distribution to the 80-percent distributee only if subsection (a) or (b)(1) of section 337 applies to such distribution.
(e) Certain Stock Sales and Distributions May Be Treated as Asset Transfers. Under regulations prescribed by the Secretary, if
(1) a corporation owns stock in another corporation meeting the requirements of section 1504(a)(2), and
(2) such corporation sells, exchanges, or distributes all of such stock, an election may be made to treat such sale, exchange, or distribution as a disposition of all of the assets of such other corporation, and no gain or loss shall be recognized on the sale, exchange, or distribution of such stock.
SEC. 337. NONRECOGNITION FOR PROPERTY DISTRIBUTED TO PARENT IN COMPLETE LIQUIDATION OF SUBSIDIARY
(a) In general. No gain or loss shall be recognized to the liquidating corporation on the distribution to the 80-percent distributee of any property in a complete liquidation to which section 332 applies.
(b) Treatment of Indebtedness of Subsidiary, Etc.
(1) Indebtedness of subsidiary to parent. If
(A) a corporation is liquidated in a liquidation to which section 332 applies, and
(B) on the date of the adoption of the plan of liquidation, such corporation was indebted to the 80-percent distributee.
for purposes of this section and section 336, any transfer of property to the 80-percent distributee in satisfaction of such indebtedness shall be treated as a distribution to such distributee in such liquidation.
(2) Treatment of tax-exempt distributee.
(A) In general. Except as provided in subparagraph (B), paragraph (1) and subsection (a) shall not apply where the 80-percent distributee is an organization (other than a cooperative described in section 521, which is exempt from the tax imposed by this chapter.
(B) Exception where property will be used in unrelated business.
(i) In general. Subparagraph (A) shall not apply to any distribution of property to an organization described in section 511(a)(2) if, immediately after such distribution, such organization uses such property in an activity the income from which is subject to tax under 511(a).
(ii) Later disposition or change in use. If any property to which clause (i) applied is disposed of by the organization acquiring such property, notwithstanding any other provision of law, any gain (not in excess of the amount not recognized by reason of clause (i)) shall be included in such organization’s unrelated business taxable income. For purposes of the preceding sentence, if such property ceases to be used in an activity referred to in clause (i), such organization shall be treated as having disposed of such property on the date of such cessation.
(c) 80-Percent Distributee. For purposes of this section, the term “80-percent distributee” means only the corporation, which meets the 80-percent stock ownership requirements specified in section 332(b). For purposes of this section, the determination of whether any corporation is an 80-percent distributee shall be made without regard to any consolidated return regulation.
(d) Regulations. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of the amendments made by subtitle D of title VI of the Tax Reform Act of 1986, including
(1) regulations to ensure that such purposes may not be circumvented through the use of any provision of law or regulations (including the consolidated return regulations and part III of this subchapter) or through the use of a regulated investment company, real estate investment trust, or tax exempt entity, and
(2) regulations providing for appropriate coordination of the provisions of this section with the provisions of this title relating to taxation of foreign corporations and their shareholders.
SEC. 338. CERTAIN STOCK PURCHASES TREATED AS ASSET ACQUISITIONS
(a) General rule. For purposes of this subtitle, if a purchasing corporation makes an election under this section (or is treated under subsection (e) as having made such an election), then, in the case of any qualified stock purchase, the target corporation—
(1) shall be treated as having sold all of its assets at the close of the acquisition date at fair market value in a single transaction, and
(2) shall be treated as a new corporation which purchased all of the assets referred to in paragraph (1) as of the beginning of the day after the acquisition date.
(b) Basis of assets after deemed purchase.
(1) In general. For purposes of subsection (a), the assets of the target corporation shall be treated as purchased for an amount equal to the sum of—
(A) the grossed-up basis of the purchasing corporation’s recently purchased stock, and
(B) the basis of the purchasing corporation’s nonrecently purchased stock.
(2) Adjustment for liabilities and other relevant items. The amount described in paragraph (1) shall be adjusted under regulations prescribed by the Secretary for liabilities of the target corporation and other relevant items.
(3) Election to step-up the basis of certain target stock.
(A) In general. Under regulations prescribed by the Secretary, the basis of the purchasing corporation’s nonrecently purchased stock shall be the basis amount determined under subparagraph (B) of this paragraph if the purchasing corporation makes an election to recognize gain as if such stock were sold on the acquisition date for an amount equal to the basis amount determined under subparagraph (B).
(B) Determination of basis amount. For purposes of subparagraph (A), the basis amount determined under this subparagraph shall be an amount equal to the grossed-up basis determined under subparagraph (A) of paragraph (1) multiplied by a fraction—
(i) the numerator of which is the percentage of stock (by value) in the target corporation attributable to the purchasing corporation’s nonrecently purchased stock, and
(ii) the denominator of which is 100 percent minus the percentage referred to in clause (i).
(4) Grossed-up basis. For purposes of paragraph (1), the grossed-up basis shall be an amount equal to the basis of the corporation’s recently purchased stock, multiplied by a fraction—
(A) the numerator of which is 100 percent, minus the percentage of stock (by value) in the target corporation attributable to the purchasing corporation’s nonrecently purchased stock, and
(B) the denominator of which is the percentage of stock (by value) in the target corporation attributable to the purchasing corporation’s recently purchased stock.
(5) Allocation among assets. The amount determined under paragraphs (1) and (2) shall be allocated among the assets of the target corporation under regulations prescribed by the Secretary.
(6) Definitions of recently purchased stock and nonrecently purchased stock. For purposes of this subsection—
(A) Recently purchased stock. The term “recently purchased stock” means any stock in the target corporation which is held by the purchasing corporation on the acquisition date and which was purchased by such corporation during the 12-month acquisition period.
(B) Nonrecently purchased stock. The term “nonrecently purchased stock” means any stock in the target corporation, which is held by the purchasing corporation on the acquisition date and which is not recently purchased stock.
(c) Repealed.
(d) Purchasing corporation; target corporation; qualified stock purchase. For purposes of this section—
(1) Purchasing corporation. The term “purchasing corporation” means any corporation which makes a qualified stock purchase of stock of another corporation.
(2) Target corporation. The term “target corporation” means any corporation the stock of which is acquired by another corporation in a qualified stock purchase.
(3) Qualified stock purchase. The term “qualified stock purchase” means any transaction or series of transactions in which stock (meeting the requirements of section 1504(a)(2)) of 1 corporation is acquired by another corporation by purchase during the 12-month acquisition period.
(e) Deemed election where purchasing corporation acquires asset of target corporation.
(1) In general. A purchasing corporation shall be treated as having made an election under this section with respect to any target corporation if, at any time during the consistency period, it acquires any asset of the target corporation (or a target affiliate).
(2) Exceptions. Paragraph (1) shall not apply with respect to any acquisition by the purchasing corporation if—
(A) such acquisition is pursuant to a sale by the target corporation (or the target affiliate) in the ordinary course of its trade or business,
(B) the basis of the property acquired is determined wholly by reference to the adjusted basis of such property in the hands of the person from whom acquired,
(C) such acquisition was before September 1, 1982, or
(D) such acquisition is described in regulations prescribed by the Secretary and meets such conditions as such regulations may provide.
(3) Anti-avoidance rule. Whenever necessary to carry out the purpose of this subsection and subsection (f), the Secretary may treat stock acquisitions which are pursuant to a plan and which meet the requirements of section 1504(a)(2) as qualified stock purchases.
(f) Consistency required for all stock acquisitions from same affiliated group. If a purchasing corporation makes qualified stock purchases with respect to the target corporation and 1 or more target affil iates during any consistency period, then (except as otherwise provided in subsection (e))—
(1) any election under this section with respect to the first such purchase shall apply to each other such purchase, and
(2) no election may be made under this section with respect to the second or subsequent such purchase if such an election was not made with respect to the first such purchase.
(g) Election.
(1) When made. Except as otherwise provided in regulations, an election under this section shall be made not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs.
(2) Manner. An election by the purchasing corporation under this section shall be made in such manner as the Secretary shall by regulations prescribe.
(3) Election irrevocable. An election by a purchasing corporation under this section, once made, shall be irrevocable.
(h) Definitions and special rules. For purposes of this section—
(1) 12-month acquisition period. The term “12-month acquisition period” means the 12-month period beginning with the date of the first acquisition by purchase of stock included in a qualified stock purchase (or, if any of such stock was acquired in an acquisition which is a purchase by reason of subparagraph (C) of paragraph (3), the date on which the acquiring corporation is first considered under section 318(a) (other than paragraph (4) thereof) as owning stock owned by the corporation from which such acquisition was made).
(2) Acquisition date. The term “acquisition date” means, with respect to any corporation, the first day on which there is a qualified stock purchase with respect to the stock of such corporation.
(3) Purchase.
(A) In general. The term “purchase” means any acquisition of stock, but only if—
(i) the basis of the stock in the hands of the purchasing corporation is not determined (I) in whole or in part by reference to the adjusted basis of such stock in the hands of the person from whom acquired, or (II) under section 1014(a) (relating to property acquired from a decedent),
(ii) the stock is not acquired in an exchange to which section 351, 354, 355, or 356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain or loss realized on the transaction, and
(iii) the stock is not acquired from a person the ownership of whose stock would, under section 318(a) (other than paragraph (4) thereof), be attributed to the person acquiring such stock.
(B) Deemed purchase under subsection (a). The term “purchase” includes any deemed purchase under subsection (a)(2). The acquisition date for a corporation which is deemed purchased under subsection (a)(2) shall be determined under regulations prescribed by the Secretary.
(C) Certain stock acquisitions from related corporations.
(i) In general. Clause (iii) of subparagraph (A) shall not apply to an acquisition of stock from a related corporation if at least 50 percent in value of the stock of such related corporation was acquired by purchase (within the meaning of subparagraphs (A) and (B)).
(ii) Certain distributions. Clause (i) of subparagraph (A) shall not apply to an acquisition of stock described in clause (i) of this subparagraph if the corporation acquiring such stock—
(I) made a qualified stock purchase of stock of the related corporation, and
(II) made an election under this section (or is treated under subsection (e) as having made such an election) with respect to such qualified stock purchase.
(iii) Related corporation defined. For purposes of this subparagraph, a corporation is a related corporation if stock owned by such corporation is treated (under section 318(a) other than paragraph (4) thereof) as owned by the corporation acquiring the stock.
(4) Consistency period.
(A) In general. Except as provided in subparagraph (B), the term “consistency period” means the period consisting of—
(i) the 1-year period before the beginning of the 12-month acquisition period for the target corporation,
(ii) such acquisition period (up to and including the acquisition date), and
(iii) the 1-year period beginning on the day after the acquisition date.
(B) Extension where there is plan. The period referred to in subparagraph (A) shall also include any period during which the Secretary determines that there was in effect a plan to make a qualified stock purchase plus 1 or more other qualified stock purchases (or asset acquisitions described in subsection (e)) with respect to the target corporation or any target affiliate.
(5) Affiliated group. The term “affiliated group” has the meaning given to such term by section 1504(a) (determined without regard to the exceptions contained in section 1504(b)).
(6) Target affiliate.
(A) In general. A corporation shall be treated as a target affiliate of the target corporation if each of such corporations was, at any time during so much of the consistency period as ends on the acquisition date of the target corporation, a member of an affiliated group which had the same common parent.
(B) Certain foreign corporations, etc. Except as otherwise provided in regulations (and subject to such conditions as may be provided in regulations)—
(i) the term “target affiliate” does not include a foreign corporation, a DISC, or a corporation to which an election under section 936 applies, and
(ii) stock held by a target affiliate in a foreign corporation or a domestic corporation which is a DISC or described in section 1248(e) shall be excluded from the operation of this section.
(7) Repealed.
(8) Acquisitions by affiliated group treated as made by 1 corporation. Except as provided in regulations prescribed by the Secretary, stock and asset acquisitions made by members of the same affiliated group shall be treated as made by 1 corporation.
(9) Target not treated as member of affiliated group. Except as otherwise provided in paragraph (10) or in regulations prescribed under this paragraph, the target corporation shall not be treated as a member of an affiliated group with respect to the sale described in subsection (a)(1).
(10) Elective recognition of gain or loss by target corporation, together with nonrecognition of gain or loss on stock sold by selling consolidated group.
(A) In general. Under regulations prescribed by the Secretary, an election may be made under which if—
(i) the target corporation was, before the transaction, a member of the selling consolidated group, and
(ii) the target corporation recognizes gain or loss with respect to the transaction as if it sold all of its assets in a single transaction, then the target corporation shall be treated as a member of the selling consolidated group with respect to such sale, and (to the extent provided in regulations) no gain or loss will be recognized on stock sold or exchanged in the transaction by members of the selling consolidated group.
(B) Selling consolidated group. For purposes of subparagraph (A), the term “selling consolidated group” means any group of corporations which (for the taxable period which includes the transaction)—
(i) includes the target corporation, and
(ii) files a consolidated return.
To the extent provided in regulations, such term also includes any affiliated group of corporations which includes the target corporation (whether or not such group files a consolidated return).
(C) Information required to be furnished to the secretary. Under regulations, where an election is made under subparagraph (A), the purchasing corporation and the common parent of the selling consolidated group shall, at such times and in such manner as may be provided in regulations, furnish to the Secretary the following information:
(i) The amount allocated under subsection (b)(5) to goodwill or going concern value.
(ii) Any modification of the amount described in clause (i).
(iii) Any other information as the Secretary deems necessary to carry out the provisions of this paragraph.
(11) Elective formula for determining fair market value. For purposes of subsection (a)(1), fair market value may be determined on the basis of a formula provided in regulations prescribed by the Secretary, which takes into account liabilities and other relevant items.
(12) Repealed.
(13) Tax on deemed sale not taken into account for estimated tax purposes. For purposes of section 6655, tax attributable to the sale described in subsection (a)(1) shall not be taken into account.
(14) Deleted.
(15) Combined deemed sale return. Under regulations prescribed by the Secretary, a combined deemed sale return may be filed by all target corporations acquired by a purchasing corporation on the same acquisition date if such target corporations were members of the same selling consolidated group (as defined in subparagraph (B) of paragraph (10)).
(16) Coordination with foreign tax credit provisions. Except as provided in regulations, this section shall not apply for purposes of determining the source or character of any item for purposes of subpart A of part III of subchapter N of this chapter (relating to foreign tax credit). The preceding sentence shall not apply to any gain to the extent such gain is includible in gross income as a dividend under section 1248 (determined without regard to any deemed sale under this section by a foreign corporation).
(i) Regulations. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including—
(1) regulations to ensure that the purpose of this section to require consistency of treatment of stock and asset sales and purchases may not be circumvented through the use of any provision of law or regulations (including the consolidated return regulations) and
(2) regulations providing for the coordination of the provisions of this section with the provision of this title relating to foreign corporations and their shareholders.
SEC. 351. TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR
(a) General rule. No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation.
(b) Receipt of property. If subsection (a) would apply to an exchange but for the fact that there is received, in addition to the stock permitted to be received under subsection (a), other property or money, then—
(1) gain (if any) to such recipient shall be recognized, but not in excess of—
(A) the amount of money received, plus
(B) the fair market value of such other property received; and
(2) no loss to such recipient shall be recognized.
(c) Special rules where distribution to shareholders.
(1) In general. In determining control for purposes of this section, the fact that any corporate transferor distributes part or all of the stock in the corporation, which it receives in the exchange to its shareholders shall not be taken into account.
(2) Special rule for section 355. If the requirements of section 355 (or so much of section 356 as relates to section 355) are met with respect to a distribution described in paragraph (1), then, solely for purposes of determining the tax treatment of the transfers of property to the controlled corporation by the distributing corporation, the fact that the shareholders of the distributing corporation dispose of part or all of the distributed stock, or the fact that the corporation whose stock was distributed issues additional stock, shall not be taken into account in determining control for purposes of this section.
(d) Services, certain indebtedness, and accrued interest not treated as property. For purposes of this section, stock issued for—
(1) services,
(2) indebtedness of the transferee corporation which is not evidenced by a security, or
(3) interest on indebtedness of the transferee corporation which accrued on or after the beginning of the transferor’s holding period for the debt, shall not be considered as issued in return for property.
(e) Exceptions. This section shall not apply to—
(1) Transfer of property to an investment company. A transfer of property to an investment company. For purposes of the preceding sentence, the determination of whether a company is an investment company shall be made—
(A) by taking into account all stock and securities held by the company, and
(B) by treating as stock and securities—
(i) money,
(ii) stocks and other equity interests in a corporation, evidences of indebtedness, options, forward or futures contracts, notional principal contracts and derivatives,
(iii) any foreign currency,
(iv) any interest in a real estate investment trust, a common trust fund, a regulated investment company, a publicly-traded partnership (as defined in section 7704(b)) or any other equity interest (other than in a corporation) which pursuant to its terms or any other arrangement is readily convertible into, or exchangeable for, any asset described in any preceding clause, this clause or clause (v) or (viii),
(v) except to the extent provided in regulations prescribed by the Secretary, any interest in a precious metal, unless such metal is used or held in the active conduct of a trade or business after the contribution,
(vi) except as otherwise provided in regulations prescribed by the Secretary, interests in any entity if substantially all of the assets of such entity consist (directly or indirectly) of any assets described in any preceding clause or clause (viii),
(vii) to the extent provided in regulations prescribed by the Secretary, any interest in any entity not described in clause (vi), but only to the extent of the value of such interest that is attributable to assets listed in clauses (i) through (v) or clause (viii), or
(viii) any other asset specified in regulations prescribed by the Secretary.
The Secretary may prescribe regulations that, under appropriate circumstances, treat any asset described in clauses (i) through (v) as not so listed.
(2) Title 11 or similar case. A transfer of property of a debtor pursuant to a plan while the debtor is under the jurisdiction of a court in a title 11 or similar case (within the meaning of section 368(a)(3)(A)), to the extent that the stock received in the exchange is used to satisfy the indebtedness of such debtor.
(f) Treatment of controlled corporation. If—
(1) property is transferred to a corporation (hereinafter in this subsection referred to as the “controlled corporation”) in an exchange with respect to which gain or loss is not recognized (in whole or in part) to the transferor under this section, and
(2) such exchange is not in pursuance of a plan of reorganization, section 311 shall apply to any transfer in such exchange by the controlled corporation in the same manner as if such transfer were a distribution to which subpart A of part I applies.
(g) Nonqualified preferred stock not treated as stock.
(1) In general. In the case of a person who transfers property to a corporation and receives nonqualified preferred stock—
(A) subsection (a) shall not apply to such transferor, and
(B) if (and only if) the transferor receives stock other than nonqualified preferred stock—
(i) subsection (b) shall apply to such transferor; and
(ii) such nonqualified preferred stock shall be treated as other property for purposes of applying subsection (b).
(2) Nonqualified preferred stock. For purposes of paragraph (1)—
(A) In general. The term “nonqualified preferred stock” means preferred stock if—
(i) the holder of such stock has the right to require the issuer or a related person to redeem or purchase the stock,
(ii) the issuer or a related person is required to redeem or purchase such stock,
(iii) the issuer or a related person has the right to redeem or purchase the stock and, as of the issue date, it is more likely than not that such right will be exercised, or
(iv) the dividend rate on such stock varies in whole or in part (directly or indirectly) with reference to interest rates, commodity prices, or other similar indices.
(B) Limitations. Clauses (i), (ii), and (iii) of subparagraph (A) shall apply only if the right or obligation referred to therein may be exercised within the 20-year period beginning on the issue date of such stock and such right or obligation is not subject to a contingency which, as of the issue date, makes remote the likelihood of the redemption or purchase.
(C) Exceptions for certain rights or obligations.
(i) In general. A right or obligation shall not be treated as described in clause (i), (ii), or (iii) of subparagraph (A) if—
(I) it may be exercised only upon the death, disability, or mental incompetency of the holder, or
(II) in the case of a right or obligation to redeem or purchase stock transferred in connection with the performance of services for the issuer or a related person (and which represents reasonable compensation), it may be exercised only upon the holder’s separation from service from the issuer or a related person.
(ii) Exception. Clause (i)(I) shall not apply if the stock relinquished in the exchange, or the stock acquired in the exchange is in—
(I) a corporation if any class of stock in such corporation or a related party is readily tradable on an established securities market or otherwise, or
(II) any other corporation if such exchange is part of a transaction or series of transactions in which such corporation is to become a corporation described in subclause (I).
(3) Definitions. For purposes of this subsection—
(A) Preferred stock. The term “preferred stock” means stock which is limited and preferred as to dividends and does not participate in corporate growth to any significant extent.
(B) Related person. A person shall be treated as related to another person if they bear a relationship to such other person described in section 267(b) or 707(b).
(4) Regulations. The Secretary may prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection and sections 354(a)(2)(C), 355(a)(3)(D), and 356(e). The Secretary may also prescribe regulations, consistent with the treatment under this subsection and such sections, for the treatment of nonqualified preferred stock under other provisions of this title.
(h) Cross references.
(1) For special rule where another party to the exchange assumes a liability, see section 357.
(2) For the basis of stock or property received in an exchange to which this section applies, see sections 358 and 362.
(3) For special rule in the case of an exchange described in this section but which results in a gift, see section 2501 and following.
(4) For special rule in the case of an exchange described in this section but which has the effect of the payment of compensation by the corporation or by a transferor, see section 61(a)(1).
(5) For coordination of this section with section 304, see section 304(b)(3).