[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: 26CFR1.358-2]

[Page 239-241]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.358-2  Allocation of basis among nonrecognition property.

    (a)(1) As used in this paragraph the term stock means stock which is 
not ``other property'' under section 356 or

[[Page 240]]

371(b), stock with respect to which a distribution is made, and, in the 
case of a surrender of part of the stock of a particular class, the 
retained part of such stock. The term securities means securities 
(including, where appropriate, fractional parts of securities) which are 
not ``other property'' under section 356 or 371(b) and in the case of a 
surrender of part of the securities of a particular class, the retained 
part of such securities. Stock, or securities, as the case may be, which 
differ either because they are in different corporations or because the 
rights attributable to them differ (although they are in the same 
corporation) are considered different classes of stock or securities, as 
the case may be, for purposes of this section.
    (2) If as the result of an exchange or distribution under the terms 
of section 354, 355, 356 or 371(b) a shareholder who owned stock of only 
one class before the transaction owns stock of two or more classes after 
the transaction, then the basis of all the stock held before the 
transaction (as adjusted under Sec. 1.358-1) shall be allocated among 
the stock of all classes (whether or not such stock was received in the 
transaction) held immediately after the transaction in proportion to the 
fair market values of the stock of each class.
    (3) If as the result of an exchange under the terms of section 354, 
355, 356 or 371(b) a security holder who owned only securities, all of 
one class, before the transaction, owns securities or stock of more than 
one class, or owns both stock and securities, then the basis of all the 
securities held before the transaction (as adjusted under Sec. 1.358-1) 
shall be allocated among all the stock and securities (whether or not 
received in the transaction) held immediately after the transaction in 
proportion to the fair market values of the stock of each class and the 
securities of each class.
    (4) In every case in which, before the transactions, a person owned 
stock of more than one class or securities of more than one class or 
owned both stock and securities, a determination must be made, upon the 
basis of all the facts, of the stock or securities received with respect 
to stock and securities of each class held (whether or not surrendered). 
The allocation described in subparagraph (2) of this paragraph shall be 
separately made as to the stock of each class with respect to which 
there is an exchange or distribution and the allocation described in 
subparagraph (3) of this paragraph shall be separately made with respect 
to the securities of each class, part or all of which are surrendered in 
the exchange.
    (5) Notwithstanding the provisions of subparagraphs (2), (3), and 
(4) of this paragraph, in any case in which a plan of recapitalization 
under section 368(a)(1)(E) provides that each holder of stock or 
securities of a particular class shall have an option to surrender some 
or none of such stock or securities in exchange for stock or securities, 
and a shareholder or security holder exchanges an identifiable part of 
his stock or securities, the basis of the part of the stock or 
securities retained shall remain unchanged and shall not be taken into 
account in determining the basis of the stock or securities received.
    (b)(1) As used in this paragraph the term stock refers only to stock 
which is not ``other property'' under section 351, 361, or 374 and the 
term securities refers only to securities which are not ``other 
property'' under section 351, 361, or 374.
    (2) If in an exchange to which section 351 or 361 applies property 
is transferred to a corporation and the transferor receives stock or 
securities of more than one class or receives both stock and securities, 
then the basis of the property transferred (as adjusted under Sec. 
1.358-1) shall be allocated among all of the stock and securities 
received in proportion to the fair market values of the stock of each 
class and the securities of each class.
    (c) The application of paragraphs (a) and (b) of this section may be 
illustrated by the following examples:

    Example (1). A, an individual, owns stock in Corporation X with an 
adjusted basis of $1,000. In a transaction qualifying under section 356 
(so far as such section relates to section 354), he exchanged this stock 
for 20 shares of stock of Corporation Y worth $1,200 and securities of 
Corporation Y worth $400. A realizes a gain of $600 of which $400 is 
recognized. The adjusted basis in A's hands of each share of the stock 
of Corporation Y is

[[Page 241]]

$50 determined by allocating the basis of the stock of Corporation X 
ratably to the stock of Corporation Y received in the exchange. The 
securities of Corporation Y have a basis in the hands of A of $400.
    Example (2). B, an individual, owns a security in the principal 
amount of $10,000 with a basis of $5,000. In a transaction to which 
section 354 is applicable, he exchanges this security for four 
securities in the principal amount of $750 each, worth $800 each, four 
securities in the principal amount of $750 each, worth $600 each, class 
A common stock worth $1,000, and class B common stock worth $400. B 
realizes a gain of $2,000, none of which is recognized. The basis of his 
original security, $5,000, will be allocated 32/70ths to the four 
securities worth $800, 24/70ths to the four securities worth $600, 10/
70ths to the class A common stock, and 4/70ths to the class B common 
stock.
    Example (3). C, an individual, owns stock of Corporation Y with a 
basis of $5,000 and owns a security issued by Corporation Y in the 
principal amount of $5,000 with a basis of $5,000. In a transaction to 
which section 354 is applicable, he exchanges the stock of Corporation Y 
for stock of Corporation Z with a value of $6,000, and he exchanges the 
security of Corporation Y for stock of Corporation Z worth $1,500 and a 
security of Corporation Z in the principal amount of $4,500 worth 
$4,500. No gain is recognized to C on either exchange. The basis of the 
stock of Corporation Z received for the stock of Corporation Y is 
$5,000. The bases of the stock and security of Corporation Z received in 
exchange for the security of Corporation Y are $1,250 and $3,750, 
respectively.
    Example (4). D, an individual, owns stock in Corporation M with a 
basis of $15,000, worth $40,000, and owns a security issued by 
Corporation M in the principal amount of $5,000 with a basis of $4,000. 
In a transaction qualifying under section 356 (so far as such section 
relates to section 355), he exchanges the security of Corporation M for 
a security of Corporation O (a controlled corporation) in the principal 
amount of $5,000, worth $5,000, and exchanges one-half of his stock of 
Corporation M for stock of Corporation O worth $15,000 and a security of 
Corporation O in the principal amount of $5,000, worth $5,000. All of 
the stock and securities of Corporation O are distributed pursuant to 
the transaction. D realizes a gain of $12,500 on the exchange of the 
stock of Corporation M for the stock and security of Corporation O of 
which $5,000 is recognized. D also realizes a gain of $1,000 on the 
exchange of a security of Corporation M for a security of Corporation O, 
none of which is recognized. The basis of his stock of Corporation M 
held before the transaction is allocated 20/35ths to the stock of 
Corporation M held after the transaction and 15/35ths to the stock of 
Corporation O. The basis of the security of Corporation O received in 
exchange for his security of Corporation M is $4,000, the basis of the 
security of Corporation M exchanged. The basis of the security of 
Corporation O received with respect to D's stock of Corporation M is 
$5,000, its fair market value.

[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7616, 44 FR 
26869, May 8, 1979; T.D. 8648, 60 FR 66079, Dec. 21, 1995]