[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: 26CFR1.371-1]

[Page 352-354]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.371-1  Exchanges by corporations.

    (a) Exchange solely for stock or securities. (1) Section 371(a)(1) 
provides for the nonrecognition of gain or loss by a corporation upon 
certain exchanges made in connection with the reorganization of an 
insolvent corporation. The section does not apply to a railroad 
corporation as defined in section 77(m) of the Bankruptcy Act (11 U.S.C. 
205(m)). In order to qualify as a section 371(a) reorganization, the 
transaction must satisfy the express statutory requirements as well as 
the underlying assumptions and purposes for which the exchange is 
excepted from the general rule requiring the recognition of gain or loss 
upon the exchange of property.
    (2) Section 371(a)(1) applies only with respect to a reorganization 
effected in one of two specified types of court proceedings: (i) 
Receivership, foreclosure, or similar proceedings, or (ii) corporate 
reorganization proceedings under chapter X of the Bankruptcy Act (11 
U.S.C. 10). The specific statutory requirements are the transfer of 
property of a corporation, in pursuance of an order of the court having 
jurisdiction of the corporation in such proceeding, to another 
corporation organized or made use of to effectuate a plan of 
reorganization approved by the court in such proceeding, in exchange 
solely for stock or securities in such other corporation. If the 
consideration for the transfer consists of other property or money as 
well as stock and securities, see section 371(a)(2) and (c). As to the 
assumption of liabilities in an exchange described in section 371(a), 
see section 371(d).
    (3) The application of section 371(a)(1) is to be strictly limited 
to a transaction of the character set forth in such section. Hence, the 
section is inapplicable unless there is a bona fide plan of 
reorganization approved by the court having jurisdiction of the 
proceeding and the transfer of the property of the insolvent corporation 
is made pursuant to such plan. It is unnecessary that the transfer be a 
direct transfer from the insolvent corporation; it is sufficient if the 
transfer is an integral step in the consummation of the reorganization 
plan approved by the court. By its terms, the section has no application 
to a reorganization consummated by adjustment of the capital or debt 
structure of the insolvent corporation without the transfer of its 
assets to another corporation.
    (4) As used in section 371(a)(1), the term reorganization is not 
controlled by the definition of reorganization contained in section 368. 
However, certain basic requirements, implicit in the statute, which are 
essential to a reorganization under section 368, are likewise essential 
to qualify a transaction as a reorganization under section 371(a)(1). 
Among these requirements

[[Page 353]]

are a continuity of the business enterprise under the modified corporate 
form and a continuity of interest therein on the part of those persons 
who were the owners of the enterprise prior to the reorganization. Thus, 
the nonrecognition accorded by section 371(a)(1) applies only to a 
genuine reorganization as distinguished from a liquidation and sale of 
property to either new or old interests supplying new capital and 
discharging the obligations of the old corporation. For the purpose of 
determining whether the requisite continuity of interest exists, the 
interest of creditors who have, by appropriate legal steps, obtained 
effective command of the property of an insolvent corporation is 
considered as the equivalent of a proprietary interest. But the mere 
possibility of a proprietary interest is not its equivalent. In general, 
any transaction will be subject to nonrecognition of gain or loss as 
prescribed by section 371(a)(1) where the property is transferred to a 
corporation and the stock and securities of such corporation are 
transferred to persons who were shareholders or creditors of the 
transferor corporation as if such stock or securities had been 
transferred to such persons as shareholders pursuant to the 
nonrecognition provisions of part III, subchapter C, chapter 1 of the 
Code. The determinative and controlling factors are the corporation's 
insolvency and the effective command by the creditors over its property. 
The term insolvent as used herein refers to insolvency at any time 
during the course of the proceeding referred to in section 371(a)(1), 
either in the sense of excess of liabilities over assets or in the sense 
of inability to meet obligations as they mature.
    (5) A short-term purchase money note is not a security within the 
meaning of this section, and the transfer of the properties of the 
insolvent corporation for cash and deferred payment obligations of the 
transferee evidenced by short-term notes is a sale and not an exchange.
    (b) Exchange for stock or securities and other property or money. If 
an exchange would be within the provisions of section 371(a)(1) if it 
were not for the fact that the consideration for the transfer of the 
property of the insolvent corporation consists not only of stock or 
securities but also of other property or money, then, as provided in 
section 371(a)(2), if the other property or money received by the 
corporation is distributed by it pursuant to the plan of reorganization, 
no gain to the corporation will be recognized. Property is distributed 
within the meaning of this section if it is paid over or distributed to 
shareholders or creditors who have by appropriate legal steps obtained 
effective command of the property of the corporation. If the other 
property or money received by the corporation is not distributed by it 
pursuant to the plan of reorganization, the gain, if any, to the 
corporation from the exchange will be recognized in an amount not in 
excess of the sum of money and the fair market value of the other 
property so received which is not distributed. In either case no loss 
from the exchange will be recognized (see section 371(c)).
    (c) Records to be kept and information to be filed. (1) Each 
corporation a party to a section 371(a) reorganization shall furnish a 
complete statement of all facts pertinent to the nonrecognition of gain 
or loss in connection with the exchange, including:
    (i) A certified copy of the plan of reorganization approved by the 
court in the proceeding, together with a statement showing in full the 
purposes thereof and in detail all transactions incident, or pursuant, 
to the plan;
    (ii) A complete statement of the cost or other basis of all 
property, including all stock or securities, transferred incident to the 
plan;
    (iii) A statement of the amount of stock or securities and other 
property or money received in the exchange, including a statement of all 
distributions or other disposition made thereof. The amount of each kind 
of stock or securities or other property shall be stated on the basis of 
the fair market value thereof at the date of the exchange;
    (iv) A statement of the amount and nature of any liabilities assumed 
upon the exchange.

The information required by this section shall be filed as a part of the 
corporation's return for its taxable year within which the 
reorganization occurred.

[[Page 354]]

    (2) Permanent records in substantial form must be kept by every 
taxpayer who participates in a tax-free exchange in connection with a 
corporate reorganization showing the cost or other basis of the 
transferred property and the amount of stock or securities and other 
property or money received (including any liabilities assumed upon the 
exchange), in order to facilitate the determination of gain or loss from 
a subsequent disposition of such stock or securities and other property 
received from th securities and other property or money received 
(including any liabilities assumed upon the exchange), in order to 
facilitate the determination of gain or loss from a subsequent 
disposition of such stock or securities and other property received from 
the exchange.