[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1002-1]

[Page 27-28]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1002-1  Sales or exchanges.

    (a) General rule. The general rule with respect to gain or loss 
realized upon the sale or exchange of property as determined under 
section 1001 is that the entire amount of such gain or loss is 
recognized except in cases where specific provisions of subtitle A of 
the code provide otherwise.
    (b) Strict construction of exceptions from general rule. The 
exceptions from the general rule requiring the recognition of all gains 
and losses, like other exceptions from a rule of taxation of general and 
uniform application, are strictly construed and do not extend either 
beyond the words or the underlying assumptions and purposes of the 
exception. Nonrecognition is accorded by the Code only if the exchange 
is one which satisfies both (1) the specific description in the Code of 
an excepted exchange, and (2) the underlying purpose for which such 
exchange is excepted from the general rule. The exchange must be germane 
to, and a necessary incident of, the investment or enterprise in hand. 
The relationship of the exchange to the venture or enterprise is always 
material, and the surrounding facts and circumstances must be shown. As 
elsewhere, the taxpayer claiming the benefit of the exception must show 
himself within the exception.
    (c) Certain exceptions to general rule. Exceptions to the general 
rule are made, for example, by sections 351(a), 354, 361(a), 371(a)(1), 
371(b)(1), 721, 1031, 1035 and 1036. These sections describe certain 
specific exchanges of property in which at the time of the exchange 
particular differences exist between the property parted with and the 
property acquired, but such differences are more formal than 
substantial. As to these, the Code provides that such differences shall 
not be deemed controlling, and that gain or loss shall not be recognized 
at the time of the exchange. The underlying assumption of these 
exceptions is that the new property is substantially a continuation of 
the old investment still unliquidated; and, in the case of 
reorganizations, that the new enterprise, the new corporate structure, 
and the new property are substantially continuations of the old still 
unliquidated.
    (d) Exchange. Ordinarily, to constitute an exchange, the transaction 
must be a reciprocal transfer of property, as distinguished from a 
transfer of property for a money consideration only.

[[Page 28]]

                   Basis Rules of General Application