[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: 26CFR1.1032-2]

[Page 117-118]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1032-2  Disposition by a corporation of stock of a controlling 
corporation in certain triangular reorganizations.

    (a) Scope. This section provides rules for certain triangular 
reorganizations described in Sec. 1.358-6(b) when the acquiring 
corporation (S) acquires property or stock of another corporation (T) in 
exchange for stock of the corporation (P) in control of S.
    (b) General nonrecognition of gain or loss. For purposes of Sec. 
1.1032-1(a), in the case of a forward triangular merger, a triangular C 
reorganization, or a triangular B reorganization (as described in Sec. 
1.358-6(b)), P stock provided by P to S, or directly to T or T's 
shareholders on behalf of S, pursuant to the plan of reorganization is 
treated as a disposition by P of shares of its own stock for T's assets 
or stock, as applicable. For rules governing the use of P stock in a 
reverse triangular merger, see section 361.
    (c) Treatment of S. S must recognize gain or loss on its exchange of 
P stock as consideration in a forward triangular merger, a triangular C 
reorganization, or a triangular B reorganization (as described in Sec. 
1.358-6(b)), if S did not receive the P stock from P pursuant to the 
plan of reorganization. See Sec. 1.358-6(d) for the effect on P's basis 
in its S or T stock, as applicable. For rules governing S's use of P 
stock in a reverse triangular merger, see section 361.

[[Page 118]]

    (d) Examples. The rules of this section are illustrated by the 
following examples. For purposes of these examples, P, S, and T are 
domestic corporations, P and S do not file consolidated returns, P owns 
all of the only class of S stock, the P stock exchanged in the 
transaction satisfies the requirements of the applicable reorganization 
provisions, and the facts set forth the only corporate activity.

    Example 1. Forward triangular merger solely for P stock. (a) Facts. 
T has assets with an aggregate basis of $60 and fair market value of 
$100 and no liabilities. Pursuant to a plan, P forms S by transferring 
$100 of P stock to S and T merges into S. In the merger, the T 
shareholders receive, in exchange for their T stock, the P stock that P 
transferred to S. The transaction is a reorganization to which sections 
368(a)(1)(A) and (a)(2)(D) apply.
    (b) No gain or loss recognized on the use of P stock. Under 
paragraph (b) of this section, the P stock provided by P pursuant to the 
plan of reorganization is treated for purposes of Sec. 1.1032-1(a) as 
disposed of by P for the T assets acquired by S in the merger. 
Consequently, neither P nor S has taxable gain or deductible loss on the 
exchange.
    Example 2. Forward triangular merger solely for P stock provided in 
part by S. (a) Facts. T has assets with an aggregate basis of $60 and 
fair market value of $100 and no liabilities. S is an operating company 
with substantial assets that has been in existence for several years. S 
also owns P stock with a $20 adjusted basis and $30 fair market value. S 
acquired the P stock in an unrelated transaction several years before 
the reorganization. Pursuant to a plan, P transfers additional P stock 
worth $70 to S and T merges into S. In the merger, the T shareholders 
receive $100 of P stock ($70 of P stock provided by P to S as part of 
the plan and $30 of P stock held by S previously). The transaction is a 
reorganization to which sections 368(a)(1)(A) and (a)(2)(D) apply.
    (b) Gain or loss recognized by S on the use of its P stock. Under 
paragraph (b) of this section, the $70 of P stock provided by P pursuant 
to the plan of reorganization is treated as disposed of by P for the T 
assets acquired by S in the merger. Consequently, neither P nor S has 
taxable gain or deductible loss on the exchange of those shares. Under 
paragraph (c) of this section, however, S recognizes $10 of gain on the 
exchange of its P stock in the reorganization because S did not receive 
the P stock from P pursuant to the plan of reorganization. See Sec. 
1.358-6(d) for the effect on P's basis in its S stock.

    (e) Stock options. The rules of this section shall apply to an 
option to buy or sell P stock issued by P in the same manner as the 
rules of this section apply to P stock.
    (f) Effective dates. This section applies to triangular 
reorganizations occurring on or after December 23, 1994, except for 
paragraph (e) of this section, which applies to transfers of stock 
options occurring on or after May 16, 2000.

[T.D. 8648, 60 FR 66081, Dec. 21, 1995, as amended by T.D. 8883, 65 FR 
31076, May 16, 2000]