[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: 26CFR1.358-1]

[Page 239]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.358-1  Basis to distributees.

    (a) In the case of an exchange or distribution to which section 354, 
355, or 371(b) applies in which, under the law applicable to the year in 
which the exchange is made, only nonrecognition property is received, 
the sum of the basis of all of the stock and securities in the 
corporation whose stock and securities are exchanged or with respect to 
which the distribution is made, held immediately after the transaction, 
plus the basis of all stock and securities received in the transaction 
shall be the same as the basis of all the stock and securities in such 
corporation held immediately before the transaction allocated in the 
manner described in Sec. 1.358-2. In the case of an exchange to which 
section 351, 361, or 374 applies in which, under the law applicable to 
the year in which the exchange was made, only nonrecognition property is 
received, the basis of all the stock and securities received in the 
exchange shall be the same as the basis of all property exchange 
therefor. If in an exchange or distribution to which section 351, 356, 
361, 371(b), or 374 applies both nonrecognition property and ``other 
property'' are received, the basis of all the property except ``other 
property'' held after the transaction shall be determined as described 
in the preceding two sentences decreased by the sum of the money and the 
fair market value of the ``other property'' (as of the date of the 
transaction) and increased by the sum of the amount treated as a 
dividend (if any) and the amount of the gain recognized on the exchange, 
but the term gain as here used does not include any portion of the 
recognized gain that was treated as a dividend. In any case in which a 
taxpayer transfers property with respect to which loss is recognized, 
such loss shall be reflected in determining the basis of the property 
received in the exchange. The basis of the ``other property'' is its 
fair market value as of the date of the transaction. See Sec. 1.460-
4(k)(3)(iv)(A) for rules relating to stock basis adjustments required 
where a contract accounted for using a long-term contract method of 
accounting is transferred in a transaction described in section 351 or a 
reorganization described in section 368(a)(1)(D) with respect to which 
the requirements of section 355 (or so much of section 356 as relates to 
section 355) are met.
    (b) The application of paragraph (a) of this section may be 
illustrated by the following example:

    Example. A purchased a share of stock in Corporation X in 1935 for 
$150. Since that date he has received distributions out of other than 
earnings and profits (as defined in section 316) totalling $60, so that 
his adjusted basis for the stock is $90. In a transaction qualifying 
under section 356, A exchanged this share for one share in Corporation 
Y, worth $100, cash in the amount of $10, and other property with a fair 
market value of $30. The exchanging had the effect of the distribution 
of a dividend. A's ratable share of the earnings and profits of 
Corporation X accumulated after February 28, 1913, was $5. A realized a 
gain of $50 on the exchange, but the amount recognized is limited to 
$40, the sum of the cash received and the fair market value of the other 
property. Of the gain recognized, $5 is taxable as a dividend, and $35 
as a gain from the exchange of property. The basis to A of the one share 
of stock of Corporation Y is $90. That is, the adjusted basis of the one 
share of stock Corporation X ($90), decreased by the sum of the cash 
received ($10) and the fair market value of the other property received 
($30) and increased by the sum of the amount treated as a dividend ($5) 
and the amount treated as a gain from the exchange of property ($35). 
The basis of the other property received is $30.

[T.D. 6500, 25 FR 11607. Nov. 26, 1960, as amended by T.D. 6533, 26 FR 
404, Jan. 19, 1965; T.D. 7616, 44 FR 26869, May 8, 1979; T.D. 8995, 67 
FR 34605, May 15, 2002]