[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: 26CFR1.371-2]

[Page 354-355]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.371-2  Exchanges by security holders.

    (a) In general. (1) Section 371(b) prescribes the rules relative to 
the recognition of gain or loss upon certain exchanges made by the 
holders of stock or securities of an insolvent corporation in connection 
with a reorganization described in section 371(a). Under section 
371(b)(1), no gain or loss shall be recognized if, pursuant to the plan 
of reorganization, stock or securities in the insolvent corporation are 
exchanged solely for stock or securities in the corporation organized or 
made use of to effectuate such plan. If, in addition to such stock or 
securities, other property or money is received upon such exchange, gain 
is recognized to the extent of such other property or money (section 
371(b)(2)), but no loss is recognized (section 371(c)). As to the basis 
of the stock or securities or other property acquired upon an exchange 
under section 371(b), see section 358.
    (2) By thus characterizing as an exchange, and regarding as a single 
taxable event, the event or series of events resulting in the 
relinquishment or extinguishment of the stock or securities in the old 
corporation and the acquisition in consideration thereof, in whole or in 
part, of stock or securities in the new corporation, the Code secures 
uniformity of treatment for the participating security holders, 
regardless of the particular steps or the procedural devices by which 
such exchange is effected. Thus, the transaction which qualified as a 
reorganization under section 371(a) may take one of several forms. In a 
typical creditors' reorganization there may be a transfer of the 
property of the old corporation to its bondholders, or the bondholders' 
committee, upon surrender of the bonds, followed by the transfer of such 
property to the new corporation in consideration of stock in the latter; 
or there may be a transfer of the bonds to the new corporation in 
exchange for its stocks or securities, followed by the transfer of the 
property of the old corporation in consideration of the surrender of its 
bonds. In either event, section 371(b) treats the result to the 
participating security holders as an exchange of the securities of the 
old corporation for securities of the new corporation. In order, 
however, to qualify as an exchange under section 371(b) the various 
events resulting in the relinquishment or extinguishment of the old 
securities and the acquisition of the new securities must be embraced 
within the plan of reorganization and must be undertaken for reasons 
germane to the plan. If the event, or series of events, qualifies as an 
exchange under section 371(b), no antecedent event necessarily a 
component of the relinquishment or extinguishment of the securities of 
the old corporation in consideration of the acquisition of the 
securities of the new corporation shall be considered a transaction or 
event having consequences for income tax purposes.
    (b) Exchange solely for stock or securities. Section 371(b)(1) 
provides that no gain or loss shall be recognized upon an exchange 
consisting of the relinquishment or extinguishment of stock or 
securities in an insolvent corporation described in section 371(a), in 
consideration of the acquisition solely of stock or securities in a 
corporation organized or made use of to effectuate the plan of 
reorganization. As used in this section, the term security does not 
include a short-term note.
    (c) Exchanges for stock or securities and other property or money. 
If an exchange would be within section 371(b)(1) if it were not for the 
fact that the property received in the exchange consists not

[[Page 355]]

only of stock or securities in the corporation organized or made use of 
to effectuate the plan of reorganization, but also of other property or 
money, then
    (1) As provided in section 371(b)(2), the gain, if any, to the 
taxpayer will be recognized in an amount not in excess of the sum of 
money and the fair market value of the other property. The gain so 
recognized shall be treated as capital gain.
    (2) The loss, if any, to the taxpayer from such an exchange is not 
to be recognized to any extent (see section 371(c)).
    (d) Records to be kept and information to be filed. (1) Every 
taxpayer who receives stock or securities and other property or money 
upon an exchange described in section 371(b) in connection with a 
corporate reorganization, must furnish a complete statement of all facts 
pertinent to the recognition or nonrecognition of gain or loss upon such 
exchange, including--
    (i) A statement of the cost or other basis of the stock or 
securities transferred in the exchange, and
    (ii) A statement in full of the amount of stock or securities and 
other property or money received from the exchange, including any 
liability assumed upon the exchange. The amount of each kind of stock or 
securities and other property (other than liabilities assumed upon the 
exchange) received shall be set forth upon the basis of the fair market 
value thereof at the date of the exchange. The statement shall be 
incorporated in the taxpayer's income tax return for the taxable year in 
which the exchange occurs.
    (2) Permanent records in substantial form shall be kept by every 
taxpayer who participates in an exchange described in section 371(b), 
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 
the exchange.