[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: 26CFR1.1081-2]

[Page 189-190]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1081-2  Purpose and scope of exception.

    (a) The general rule is that the entire amount of gain or loss from 
the sale or exchange of property is to be recognized (see section 1002) 
and that the entire amount received as a dividend is to be included in 
gross income. (See sections 61 and 301.) Exceptions to the general rule 
are provided elsewhere in subchapters C and O, chapter 1 of the Code, 
one of which is that made by section 1081 with respect to exchanges, 
sales, and distributions specifically described in section 1081. Section 
1081 provides the extent to which gain or loss is not to be recognized 
on (1) the receipt of a distribution described in section 1081(c)(2), or 
(2) an exchange or sale, or the receipt of a distribution, made in 
obedience to an order of the Securities and Exchange Commission, which 
is issued to effectuate the provisions of section 11 (b) of the Public 
Utility Holding Company Act of 1935 (15 U.S.C. 79k (b)). Section 331 
provides that a distribution in liquidation of a corporation shall be 
treated as an exchange. Such distribution is to be treated as an 
exchange under the provisions of sections 1081 to 1083, inclusive. The 
order of the Securities and Exchange Commission must be one requiring or 
approving action which the Commission finds to be necessary or 
appropriate to effect a simplification or geographical integration of a 
particular public utility holding company system. For specific 
requirements with respect to an order of the Securities and Exchange 
Commission, see section 1081 (f).
    (b) The requirements for nonrecognition of gain or loss as provided 
in section 1081 are precisely stated with respect to the following 
general types of transactions:

[[Page 190]]

    (1) The exchange that is provided for in section 1081 (a), in which 
stock or securities in a registered holding company or a majority-owned 
subsidiary company are exchanged for stock or securities.
    (2) The exchange that is provided for in section 1081 (b), in which 
a registered holding company or an associate company of a registered 
holding company exchanges property for property.
    (3) The distribution that is provided for in section 1081 (c)(1), in 
which stock or securities are distributed to a shareholder in a 
corporation which is a registered holding company or a majority-owned 
subsidiary company, or the distribution that is provided for in section 
1081 (c)(2), in which a corporation distributes to a shareholder, rights 
to acquire common stock in a second corporation.
    (4) The transfer that is provided for in section 1081 (d), in which 
a corporation which is a member of a system group transfers property to 
another member of the same system group.

Certain rules with respect to the receipt of nonexempt property on an 
exchange described in section 1081 (a) are prescribed in section 1081 
(e).
    (c) These exceptions to the general rule are to be strictly 
construed. Unless both the purpose and the specific requirements of 
sections 1081 to 1083, inclusive, are clearly met, the recognition of 
gain or loss upon the exchange, sale, or distribution will not be 
postponed under those sections. Moreover, even though a taxable 
transaction occurs in connection or simultaneously with a realization of 
gain or loss to which nonrecognition is accorded, nevertheless, 
nonrecognition will not be accorded to such taxable transaction. In 
other words, the provisions of section 1081 do not extend in any case to 
gain or loss other than that realized from and directly attributable to 
a disposition of property as such, or the receipt of a corporate 
distribution as such, in an exchange, sale, or distribution specifically 
described in section 1081.
    (d) The application of the provisions of part VI (section 1081 and 
following), subchapter O, chapter 1 of the Code, is intended to result 
only in postponing the recognition of gain or loss until a disposition 
of property is made which is not covered by such provisions, and, in the 
case of an exchange or sale subject to the provisions of section 1081 
(b), in the reduction of basis of certain property. The provisions of 
section 1082 with respect to the continuation of basis and the reduction 
in basis are designed to effect these results. Although the time of 
recognition may be shifted, there must be a true reflection of income in 
all cases, and it is intended that the provisions of such part VI, shall 
not be construed or applied in such a way as to defeat this purpose.