[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: 26CFR1.358-6]

[Page 242-246]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.358-6  Stock basis in certain triangular reorganizations.

    (a) Scope. This section provides rules for computing the basis of a 
controlling corporation in the stock of a controlled corporation as the 
result of certain reorganizations involving the stock of the controlling 
corporation as described in paragraph (b) of this section. The rules of 
this section are in addition to rules under other provisions of the 
Internal Revenue Code and principles of law. See, e.g., section 1001 for 
the recognition of gain or loss by the controlled corporation on the 
exchange of property for the assets or stock of a target corporation in 
a reorganization described in section 368.
    (b) Triangular reorganizations--(1) Nomenclature. For purposes of 
this section--
    (i) P is a corporation--
    (A) That is a party to a reorganization,
    (B) That is in control (within the meaning of section 368(c)) of 
another party to the reorganization, and
    (C) Whose stock is transferred pursuant to the reorganization.
    (ii) S is a corporation--
    (A) That is a party to the reorganization, and
    (B) That is controlled by P.
    (iii) T is a corporation that is another party to the 
reorganization.
    (2) Definitions of triangular reorganizations. This section applies 
to the following reorganizations (which are referred to collectively as 
triangular reorganizations):
    (i) Forward triangular merger. A forward triangular merger is a 
statutory merger of T and S, with S surviving, that qualifies as a 
reorganization under section 368(a)(1)(A) or (G) by reason of the 
application of section 368(a)(2)(D).
    (ii) Triangular C reorganization. A triangular C reorganization is 
an acquisition by S of substantially all of T's assets in exchange for P 
stock in a transaction that qualifies as a reorganization under section 
368(a)(1)(C).
    (iii) Reverse triangular merger. A reverse triangular merger is a 
statutory merger of S and T, with T surviving, that qualifies as a 
reorganization under section 368(a)(1)(A) by reason of the application 
of section 368(a)(2)(E).
    (iv) Triangular B reorganization. A triangular B reorganization is 
an acquisition by S of T stock in exchange for P stock in a transaction 
that qualifies as a reorganization under section 368(a)(1)(B).
    (c) General rules. Subject to the special rule provided in paragraph 
(d) of this section, P's basis in the stock of S or T, as applicable, as 
a result of a triangular reorganization, is adjusted under the following 
rules--
    (1) Forward triangular merger or triangular C reorganization--(i) In 
general.

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In a forward triangular merger or a triangular C reorganization, P's 
basis in its S stock is adjusted as if--
    (A) P acquired the T assets acquired by S in the reorganization (and 
P assumed any liabilities which S assumed or to which the T assets 
acquired by S were subject) directly from T in a transaction in which 
P's basis in the T assets was determined under section 362(b); and
    (B) P transferred the T assets (and liabilities which S assumed or 
to which the T assets acquired by S were subject) to S in a transaction 
in which P's basis in S stock was determined under section 358.
    (ii) Limitation. If, in applying section 358, the amount of T 
liabilities assumed by S or to which the T assets acquired by S are 
subject equals or exceeds T's aggregate adjusted basis in its assets, 
the amount of the adjustment under paragraph (c)(1)(i) of this section 
is zero. P recognizes no gain under section 357(c) as a result of a 
triangular reorganization.
    (2) Reverse triangular merger--(i) In general--(A) Treated as a 
forward triangular merger. Except as otherwise provided in this 
paragraph (c)(2), P's basis in its T stock acquired in a reverse 
triangular merger equals its basis in its S stock immediately before the 
transaction adjusted as if T had merged into S in a forward triangular 
merger to which paragraph (c)(1) of this section applies.
    (B) Allocable share. If P acquires less than all of the T stock in 
the transaction, the basis adjustment described in paragraph 
(c)(2)(i)(A) of this section is reduced in proportion to the percentage 
of T stock not acquired in the transaction. The percentage of T stock 
not acquired in the transaction is determined by taking into account the 
fair market value of all classes of T stock.
    (C) Special rule if P owns T stock before the transaction. Solely 
for purposes of paragraphs (c)(2)(i)(A) and (B) of this section, if P 
owns T stock before the transaction, P may treat that stock as acquired 
in the transaction or not, without regard to the form of the 
transaction.
    (ii) Reverse triangular merger that qualifies as a section 351 
transfer or section 368(a)(1)(B) reorganization. Notwithstanding 
paragraph (c)(2)(i) of this section, if a reorganization qualifies as 
both a reverse triangular merger and as a section 351 transfer or as 
both a reverse triangular merger and a reorganization under section 
368(a)(1)(B), P can--
    (A) Determine the basis in its T stock as if paragraph (c)(2)(i) of 
this section applies; or
    (B) Determine the basis in the T stock acquired as if P acquired 
such stock from the former T shareholders in a transaction in which P's 
basis in the T stock was determined under section 362(b).
    (3) Triangular B reorganization. In a triangular B reorganization, 
P's basis in its S stock is adjusted as if--
    (i) P acquired the T stock acquired by S in the reorganization 
directly from the T shareholders in a transaction in which P's basis in 
the T stock was determined under section 362(b); and
    (ii) P transferred the T stock to S in a transaction in which P's 
basis in its S stock was determined under section 358.
    (4) Examples. The rules of this paragraph (c) are illustrated by the 
following examples. For purposes of these examples, P, S, and T are 
domestic corporations, P and S do not file consolidated returns, P owns 
all of the only class of S stock, the P stock exchanged in the 
transaction satisfies the requirements of the applicable triangular 
reorganization provisions, and the facts set forth the only corporate 
activity.

    Example 1. Forward triangular merger. (a)  Facts. T has assets with 
an aggregate basis of $60 and fair market value of $100 and no 
liabilities. Pursuant to a plan, P forms S with $5 cash (which S 
retains), and T merges into S. In the merger, the T shareholders receive 
P stock worth $100 in exchange for their T stock. The transaction is a 
reorganization to which sections 368(a)(1)(A) and (a)(2)(D) apply.
    (b) Basis adjustment. Under Sec. 1.358-6(c)(1), P's $5 basis in its 
S stock is adjusted as if P acquired the T assets acquired by S in the 
reorganization directly from T in a transaction in which P's basis in 
the T assets was determined under section 362(b). Under section 362(b), 
P would have an aggregate basis of $60 in the T assets. P is then 
treated as if it transferred the T assets to S in a transaction in which 
P's basis in the S stock was determined under section 358. Under section 
358,

[[Page 244]]

P's $5 basis in its S stock would be increased by the $60 basis in the T 
assets deemed transferred. Consequently, P has a $65 basis in its S 
stock as a result of the reorganization.
    (c) Use of pre-existing S. The facts are the same as paragraph (a) 
of this Example 1, except that S is an operating company with 
substantial assets that has been in existence for several years. P has a 
$110 basis in the S stock. Under Sec. 1.358-6(c)(1), P's $110 basis in 
its S stock is increased by the $60 basis in the T assets deemed 
transferred. Consequently, P has a $170 basis in its S stock as a result 
of the reorganization.
    (d) Mixed consideration. The facts are the same as paragraph (a) of 
this Example 1, except that the T shareholders receive P stock worth $80 
and $20 cash from P. Under section 358, P's $5 basis in its S stock is 
increased by the $60 basis in the T assets deemed transferred. 
Consequently, P has a $65 basis in its S stock as a result of the 
reorganization.
    (e) Liabilities. The facts are the same as paragraph (a) of this 
Example 1, except that T's assets are subject to $50 of liabilities, and 
the T shareholders receive $50 of P stock in exchange for their T stock. 
Under section 358, P's basis in its S stock is increased by the $60 
basis in the T assets deemed transferred and decreased by the $50 of 
liabilities to which the T assets acquired by S are subject. 
Consequently, P has a net basis adjustment of $10, and a $15 basis in 
its S stock as a result of the reorganization.
    (f) Liabilities in excess of basis. The facts are the same as in 
paragraph (a) of this Example 1, except that T's assets are subject to 
liabilities of $90, and the T shareholders receive $10 of P stock in 
exchange for their T stock in the reorganization. Under Sec. 1.358-
6(c)(1)(ii), the adjustment under Sec. 1.358-6(c) is zero if the amount 
of the liabilities which S assumed or to which the T assets acquired by 
S are subject exceeds the aggregate adjusted basis in T's assets. 
Consequently, P has no adjustment in its S stock, and P has a $5 basis 
in its S stock as a result of the reorganization.
    Example 2. Reverse triangular merger. (a) Facts. T has assets with 
an aggregate basis of $60 and a fair market value of $100 and no 
liabilities. P has a $110 basis in its S stock. Pursuant to a plan, S 
merges into T with T surviving. In the merger, the T shareholders 
receive $10 cash from P and P stock worth $90 in exchange for their T 
stock. The transaction is a reorganization to which sections 
368(a)(1)(A) and (a)(2)(E) apply.
    (b) Basis adjustment. Under Sec. 1.358-6(c)(2)(i)(A), P's basis in 
the T stock acquired is P's $110 basis in its S stock before the 
transaction, adjusted as if T had merged into S in a forward triangular 
merger to which Sec. 1.358-6(c)(1) applies. In such a case, P's $110 
basis in its S stock before the transaction would have been increased by 
the $60 basis of the T assets deemed transferred. Consequently, P has a 
$170 basis in its T stock immediately after the transaction.
    (c) Reverse triangular merger that also qualifies under section 
368(a)(1)(B). The facts relating to T are the same as in paragraph (a) 
of this Example 2. P, however, forms S pursuant to the plan of 
reorganization. The T shareholders receive $100 worth of P stock (and no 
cash) in exchange for their T stock. The T shareholders have an 
aggregate basis in their T stock of $85 immediately before the 
reorganization. The reorganization qualifies as both a reverse 
triangular merger and a reorganization under section 368(a)(1)(B). Under 
Sec. 1.358-6(c)(2)(ii), P may determine its basis in its T stock either 
as if Sec. 1.358-6(c)(2)(i) applied to the T stock acquired, or as if P 
acquired the T stock from the former T shareholders in a transaction in 
which P's basis in the T stock was determined under section 362(b). 
Accordingly, P may determine a basis in its T stock of $60 (T's net 
asset basis) or $85 (the T shareholders' aggregate basis in the T stock 
immediately before the reorganization).
    (d) Allocable share in a reverse triangular merger. The facts are 
the same as in paragraph (a) of this Example 2, except that X, a 10% 
shareholder of T, does not participate in the transaction. The remaining 
T shareholders receive $10 cash from P and P stock worth $80 for their T 
stock. P owns 90% of the T stock after the transaction. Under Sec. 
1.358-6(c)(2)(i)(A), P's basis in its T stock is P's $110 basis in its S 
stock before the reorganization, adjusted as if T had merged into S in a 
forward triangular merger. In such a case, P's basis would have been 
adjusted by the $60 basis in the T assets deemed transferred. Under 
Sec. 1.358-6(c)(2)(i)(B), however, the basis adjustment determined 
under Sec. 1.358-6(c)(2)(i)(A) is reduced in proportion to the 
percentage of T stock not acquired by P in the transaction. The 
percentage of T stock not acquired in the transaction is 10%. Therefore, 
P reduces its $60 basis adjustment by 10%, resulting in a net basis 
adjustment of $54. Consequently, P has a $164 basis in its T stock as a 
result of the transaction.
    (e) P's ownership of T stock. The facts are the same as in paragraph 
(a) of this Example 2, except that P owns 10% of the T stock before the 
transaction. P's basis in that T stock is $8. All the T shareholders 
other than P surrender their T stock for $10 cash from P and P stock 
worth $80. P does not surrender the stock in the transaction. Under 
Sec. 1.358-6(c)(2)(i)(C), P may treat its T stock owned before the 
transaction as acquired in the transaction or not. If P treats that T 
stock as acquired in the transaction, P's basis in that T stock and the 
T stock actually acquired in the transaction equals P's $110 basis in 
its S stock before the transaction, adjusted by the $60 basis of the T 
assets deemed transferred, for a total basis of $170.

[[Page 245]]

If P treats its T stock as not acquired, P retains its $8 pre-
transaction basis in that stock. P's basis in its other T shares equals 
P's $110 basis in its S stock before the transaction, adjusted by $54 
(the $60 basis in the T assets deemed transferred, reduced by 10%), for 
a total basis of $164 in those shares. See Sec. 1.358-6(c)(2)(i)(A) and 
(B). Consequently, if P treats its T shares as not acquired, P's total 
basis in all of its T shares is $172.
    Example 3. Triangular B reorganization. (a) Facts. T has assets with 
a fair market value of $100 and no liabilities. The T shareholders have 
an aggregate basis in their T stock of $85 immediately before the 
reorganization. Pursuant to a plan, P forms S with $5 cash and S 
acquires all of the T stock in exchange for $100 of P stock. The 
transaction is a reorganization to which section 368(a)(1)(B) applies.
    (b) Basis adjustment. Under Sec. 1.358-6(c)(3), P adjusts its $5 
basis in its S stock by treating P as if it acquired the T stock 
acquired by S in the reorganization directly from the T shareholders in 
exchange for the P stock in a transaction in which P's basis in the T 
stock was determined under section 362(b). Under section 362(b), P would 
have an aggregate basis of $85 in the T stock received by S in the 
reorganization. P is then treated as if it transferred the T stock to S 
in a transaction in which P's basis in the S stock was determined under 
section 358. Under section 358, P's basis in its S stock would be 
increased by the $85 basis in the T stock deemed transferred. 
Consequently, P has a $90 basis in its S stock as a result of the 
reorganization.

    (d) Special rule for consideration not provided by P--(1) In 
general. The amount of P's adjustment to basis in its S or T stock, as 
applicable, described in paragraph (c) of this section is decreased by 
the fair market value of any consideration (including P stock in which 
gain or loss is recognized, see Sec. 1.1032-2(c)) that is exchanged in 
the reorganization and that is not provided by P pursuant to the plan of 
reorganization. This paragraph (d) does not apply to the amount of T 
liabilities assumed by S or to which the T assets acquired by S are 
subject under paragraph (c)(1) of this section (or deemed assumed or 
taken subject to by S under paragraph (c)(2)(i) of this section).
    (2) Limitation. P makes no adjustment to basis under this section if 
the decrease required under paragraph (d)(1) of this section equals or 
exceeds the amount of the adjustment described in paragraph (c) of this 
section.
    (3) Example. The rules of this paragraph (d) are illustrated by the 
following example. For purposes of this example, P, S, and T are 
domestic corporations, P and S do not file consolidated returns, P owns 
all of the only class of S stock, the P stock exchanged in the 
transaction satisfies the requirements of the applicable triangular 
reorganization provisions, and the facts set forth the only corporate 
activity.

    Example. (a) Facts. T has assets with an aggregate basis of $60 and 
fair market value of $100 and no liabilities. S is an operating company 
with substantial assets that has been in existence for several years. P 
has a $100 basis in its S stock. Pursuant to a plan, T merges into S and 
the T shareholders receive $70 of P stock provided by P pursuant to the 
plan and $30 of cash provided by S in exchange for their T stock. The 
transaction is a reorganization to which sections 368(a)(1)(A) and 
(a)(2)(D) apply.
    (b) Basis adjustment. Under Sec. 1.358-6(c)(1), P's $100 basis in 
its S stock is increased by the $60 basis in the T assets deemed 
transferred. Under Sec. 1.358-6(d)(1), the $60 adjustment is decreased 
by the $30 of cash provided by S in the reorganization. Consequently, P 
has a net adjustment of $30 in its S stock, and P has a $130 basis in 
its S stock as a result of the reorganization.
    (c) Appreciated asset. The facts are the same as in paragraph (a) of 
this Example, except that in the reorganization S provides an asset with 
a $20 adjusted basis and $30 fair market value instead of $30 of cash. 
The basis results are the same as in paragraph (b) of this Example. In 
addition, S recognizes $10 of gain under section 1001 on its disposition 
of the asset in the reorganization.
    (d) Depreciated asset. The facts are the same as in paragraph (c) of 
this Example, except that S has a $60 adjusted basis in the asset. The 
basis results are the same as in paragraph (b) of this Example. In 
addition, S recognizes $30 of loss under section 1001 on its disposition 
of the asset in the reorganization.
    (e) P stock. The facts are the same as in paragraph (a) of this 
Example, except that in the reorganization S provides P stock with a 
fair market value of $30 instead of $30 of cash. S acquired the P stock 
in an unrelated transaction several years before the reorganization. S 
has a $20 adjusted basis in the P stock. The basis results are the same 
as in paragraph (b) of this Example. In addition, S recognizes $10 of 
gain on its disposition of the P stock in the reorganization. See Sec. 
1.1032-2(c).

    (e) Cross-reference. For rules relating to stock basis adjustments 
made as a result of a triangular reorganization in

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which P and S, or P and T, as applicable, are, or become, members of a 
consolidated group, see Sec. 1.1502-30. For rules relating to stock 
basis adjustments after a group structure change, see Sec. 1.1502-31.
    (f) Effective dates--(1) General rule. Except as otherwise provided 
in this paragraph (f), this section applies to triangular 
reorganizations occurring on or after December 23, 1994.
    (2) Special rule for reverse triangular mergers. For a reverse 
triangular merger occurring before December 23, 1994, P may--
    (i) Determine the basis in its T stock as if paragraph (c)(2)(i) of 
this section applied; or
    (ii) Determine the basis in its T stock acquired as if P acquired 
such stock from the former T shareholders in a transaction in which P's 
basis in the T stock was determined under section 362(b).

[T.D. 8648, 60 FR 66079, Dec. 21, 1995; 61 FR 11547, Mar. 21, 1996]

                         effects on corporation