[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.