[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.356-1]

[Page 232-233]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.356-1  Receipt of additional consideration in connection with 
an exchange.

    (a) If in any exchange to which the provisions of section 354 or 
section 355 would apply except for the fact that there is received by 
the shareholders or the security holders other property (in addition to 
property permitted to be received without recognition of gain by such 
sections) or money, then--
    (1) The gain, if any, to the taxpayer shall be recognized in an 
amount not in

[[Page 233]]

excess of the sum of the money and the fair market value of the other 
property, but,
    (2) The loss, if any, to the taxpayer from the exchange or 
distribution shall not be recognized to any extent.
    (b) If the distribution of such other property or money by or on 
behalf of a corporation has the effect of the distribution of a 
dividend, then there shall be chargeable to each distributee (either an 
individual or a corporation)--
    (1) As a dividend, such an amount of the gain recognized as is not 
in excess of the distributee's ratable share of the undistributed 
earnings and profits of the corporation accumulated after February 28, 
1913, and
    (2) As a gain from the exchange of property, the remainder of the 
gain so recognized.
    (c) This section may be illustrated by the following examples:

    Example (1). In an exchange to which the provisions of section 356 
apply and to which section 354 would apply but for the receipt of 
property not permitted to be received without the recognition of gain or 
loss, A (either an individual or a corporation), received the following 
in exchange for a share of stock having an adjusted basis to him of $85:

One share of stock worth.........................................   $100
Cash.............................................................     25
Other property (basis $25) fair market value.....................     50
                                                                  ------
  Total fair market value of consideration received..............    175
Adjusted basis of stock surrendered in exchange..................     85
                                                                  ------
  Total gain.....................................................     90
                                                                  ======
Gain to be recognized, limited to cash and other property             75
 received........................................................
A's pro rata share of earnings and profits accumulated after          30
 February 28, 1913 (taxable dividend)............................
                                                                  ------
  Remainder to be treated as a gain from the exchange of property     45


    Example (2). If, in Example (1), A's stock had an adjusted basis to 
him of $200, he would have realized a loss of $25 on the exchange, which 
loss would not be recognized.

    (d) Section 301(b)(1)(B) and section 301(d)(2) do not apply to a 
distribution of ``other property'' to a corporate shareholder if such 
distribution is within the provisions of section 356.
    (e) See paragraph (1) of Sec. 1.301-1 for certain transactions 
which are not within the scope of section 356.