[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: 26CFR1.374-1]

[Page 356-358]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.374-1  Exchanges by insolvent railroad corporations.

    (a) Exchange solely for stock or securities. (1) Section 374(a)(1) 
provides for the nonrecognition of gain or loss by an insolvent railroad 
corporation upon certain exchanges made in connection with the 
reorganization of the corporation. In order to qualify as a section 
374(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 374(a)(1) applies only with respect to a reorganization 
effected in one of two specified types of court proceedings: (i) 
Receivership proceedings, or (ii) proceedings under section 77 of the 
Bankruptcy Act (11 U.S.C. 205). The specific statutory requirements are 
the transfer after July 31, 1955, of property of a railroad corporation, 
as defined in section 77(m) of the Bankruptcy Act (11 U.S.C. 205(m)), in 
pursuance of an order of the court having jurisdiction of the 
corporation in such proceeding, to another railroad corporation, as 
defined in section 77(m) of the Bankruptcy Act, 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 
railroad corporation. If the consideration for the transfer consists of 
other property or money as well as stock and securities, see section 
374(a)(2) and (3) and paragraph (b) of

[[Page 357]]

this section. As to the assumption of liabilities in an exchange 
described in section 374(a), see section 357 and paragraph (a)(1) and 
(2) of Sec. 1.357-1 and paragraph (a) of Sec. 1.357-2.
    (3) The application of section 374(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 railroad 
corporation is made pursuant to such plan. It is unnecessary that the 
transfer be a direct transfer from the insolvent railroad 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 railroad corporation 
without the transfer of its assets to another railroad corporation.
    (4) As used in section 374(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 374(a)(1). 
Among these requirements 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 
374(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 
railroad 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 railroad 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 374(a)(1) where the property is transferred to a railroad 
corporation and the stock and securities of such corporation are 
transferred to persons who were shareholders or creditors of the 
transferor railroad 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 railroad 
corporation's insolvency and the effective command by the creditors over 
its property. The term insolvent as used in this section refers to 
insolvency at any time during the course of the proceeding referred to 
in section 374(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 railroad 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 374(a)(1) if it 
were not for the fact that the consideration for the transfer of the 
property of the insolvent railroad corporation consists not only of 
stock or securities but also of other property or money, then, as 
provided in section 374(a)(2), if the other property or money received 
by the railroad corporation is distributed by it pursuant to the plan of 
reorganization, no gain to the railroad 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 railroad 
corporation. If the other property or money received by the railroad 
corporation is not distributed by it pursuant to the plan of 
reorganization, the gain, if any, to the railroad corporation from the 
exchange will be recognized in an amount not in excess of the sum of

[[Page 358]]

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 374(a)(3)). See section 354(c) relative to 
exchanges by stock or security holders.

[T.D. 6528, 26 FR 400, Jan. 19, 1961]