Internal Revenue Code:Sec. 355. Distribution of stock and securities of a controlled corporation
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter C - Corporate Distributions and Adjustments
PART III - CORPORATE ORGANIZATIONS AND REORGANIZATIONS
Subpart B - Effects on Shareholders and Security Holders
Statute
Sec. 355. Distribution of stock and securities of a controlled
corporation
(a) Effect on distributees
(1) General rule
If -
(A) a corporation (referred to in this section as the
''distributing corporation'') -
(i) distributes to a shareholder, with respect to its
stock, or
(ii) distributes to a security holder, in exchange for its
securities,
solely stock or securities of a corporation (referred to in
this section as ''controlled corporation'') which it controls
immediately before the distribution,
(B) the transaction was not used principally as a device for
the distribution of the earnings and profits of the
distributing corporation or the controlled corporation or both
(but the mere fact that subsequent to the distribution stock or
securities in one or more of such corporations are sold or
exchanged by all or some of the distributees (other than
pursuant to an arrangement negotiated or agreed upon prior to
such distribution) shall not be construed to mean that the
transaction was used principally as such a device),
(C) the requirements of subsection (b) (relating to active
businesses) are satisfied, and
(D) as part of the distribution, the distributing corporation
distributes -
(i) all of the stock and securities in the controlled
corporation held by it immediately before the distribution,
or
(ii) an amount of stock in the controlled corporation
constituting control within the meaning of section 368(c),
and it is established to the satisfaction of the Secretary
that the retention by the distributing corporation of stock
(or stock and securities) in the controlled corporation was
not in pursuance of a plan having as one of its principal
purposes the avoidance of Federal income tax,
then no gain or loss shall be recognized to (and no amount shall
be includible in the income of) such shareholder or security
holder on the receipt of such stock or securities.
(2) Non pro rata distributions, etc.
Paragraph (1) shall be applied without regard to the following:
(A) whether or not the distribution is pro rata with respect
to all of the shareholders of the distributing corporation,
(B) whether or not the shareholder surrenders stock in the
distributing corporation, and
(C) whether or not the distribution is in pursuance of a plan
of reorganization (within the meaning of section 368(a)(1)(D)).
(3) Limitations
(A) Excess principal amount
Paragraph (1) shall not apply if -
(i) the principal amount of the securities in the
controlled corporation which are received exceeds the
principal amount of the securities which are surrendered in
connection with such distribution, or
(ii) securities in the controlled corporation are received
and no securities are surrendered in connection with such
distribution.
(B) Stock acquired in taxable transactions within 5 years
treated as boot
For purposes of this section (other than paragraph (1)(D) of
this subsection) and so much of section 356 as relates to this
section, stock of a controlled corporation acquired by the
distributing corporation by reason of any transaction -
(i) which occurs within 5 years of the distribution of such
stock, and
(ii) in which gain or loss was recognized in whole or in
part,
shall not be treated as stock of such controlled corporation,
but as other property.
(C) Property attributable to accrued interest
Neither paragraph (1) nor so much of section 356 as relates
to paragraph (1) shall apply to the extent that any stock
(including nonqualified preferred stock, as defined in section
351(g)(2)), securities, or other property received is
attributable to interest which has accrued on securities on or
after the beginning of the holder's holding period.
(D) Nonqualified preferred stock
Nonqualified preferred stock (as defined in section
351(g)(2)) received in a distribution with respect to stock
other than nonqualified preferred stock (as so defined) shall
not be treated as stock or securities.
(4) Cross references
(A) For treatment of the exchange if any property is received
which is not permitted to be received under this subsection
(including nonqualified preferred stock and an excess principal
amount of securities received over securities surrendered, but
not including property to which paragraph (3)(C) applies), see
section 356.
(B) For treatment of accrued interest in the case of an
exchange described in paragraph (3)(C), see section 61.
(b) Requirements as to active business
(1) In general
Subsection (a) shall apply only if either -
(A) the distributing corporation, and the controlled
corporation (or, if stock of more than one controlled
corporation is distributed, each of such corporations), is
engaged immediately after the distribution in the active
conduct of a trade or business, or
(B) immediately before the distribution, the distributing
corporation had no assets other than stock or securities in the
controlled corporations and each of the controlled corporations
is engaged immediately after the distribution in the active
conduct of a trade or business.
(2) Definition
For purposes of paragraph (1), a corporation shall be treated
as engaged in the active conduct of a trade or business if and
only if -
(A) it is engaged in the active conduct of a trade
or business,
(B) such trade or business has been actively conducted
throughout the 5-year period ending on the date of the
distribution,
(C) such trade or business was not acquired within the period
described in subparagraph (B) in a transaction in which gain or
loss was recognized in whole or in part, and
(D) control of a corporation which (at the time of
acquisition of control) was conducting such trade or business -
(i) was not acquired by any distributee corporation
directly (or through 1 or more corporations, whether through
the distributing corporation or otherwise) within the period
described in subparagraph (B) and was not acquired by the
distributing corporation directly (or through 1 or more
corporations) within such period, or
(ii) was so acquired by any such corporation within such
period, but, in each case in which such control was so
acquired, it was so acquired, only by reason of transactions
in which gain or loss was not recognized in whole or in part,
or only by reason of such transactions combined with
acquisitions before the beginning of such period.
For purposes of subparagraph (D), all distributee corporations
which are members of the same affiliated group (as defined in
section 1504(a) without regard to section 1504(b)) shall be
treated as 1 distributee corporation.
(3) Special rules for determining active conduct in the
case of affiliated groups.--
(A) In general.--For purposes of determining
whether a corporation meets the requirements of
paragraph (2)(A), all members of such corporation's
separate affiliated group shall be treated as one
corporation.
(B) Separate affiliated group.--For purposes of
this paragraph, the term `separate affiliated group'
means, with respect to any corporation, the affiliated
group which would be determined under section 1504(a) if
such corporation were the common parent and section
1504(b) did not apply.
(C) Treatment of trade or business conducted by
acquired member.--If a corporation became a member of a
separate affiliated group as a result of one or more
transactions in which gain or loss was recognized in
whole or in part, any trade or business conducted by
such corporation (at the time that such corporation
became such a member) shall be treated for purposes of
paragraph (2) as acquired in a transaction in which gain
or loss was recognized in whole or in part.
(D) Regulations.--The Secretary shall prescribe
such regulations as are necessary or appropriate to
carry out the purposes of this paragraph, including
regulations which provide for the proper application of
subparagraphs (B), (C), and (D) of paragraph (2), and
modify the application of subsection (a)(3)(B), in
connection with the application of this paragraph.
(c) Taxability of corporation on distribution
(1) In general
Except as provided in paragraph (2), no gain or loss shall be
recognized to a corporation on any distribution to which this
section (or so much of section 356 as relates to this section)
applies and which is not in pursuance of a plan of
reorganization.
(2) Distribution of appreciated property
(A) In general
If -
(i) in a distribution referred to in paragraph (1), the
corporation distributes property other than qualified
property, and
(ii) the fair market value of such property exceeds its
adjusted basis (in the hands of the distributing
corporation),
then gain shall be recognized to the distributing corporation
as if such property were sold to the distributee at its fair
market value.
(B) Qualified property
For purposes of subparagraph (A), the term ''qualified
property'' means any stock or securities in the controlled
corporation.
(C) Treatment of liabilities
If any property distributed in the distribution referred to
in paragraph (1) is subject to a liability or the shareholder
assumes a liability of the distributing corporation in
connection with the distribution, then, for purposes of
subparagraph (A), the fair market value of such property shall
be treated as not less than the amount of such liability.
(3) Coordination with sections 311 and 336(a)
Sections 311 and 336(a) shall not apply to any distribution
referred to in paragraph (1).
(d) Recognition of gain on certain distributions of stock or
securities in controlled corporation
(1) In general
In the case of a disqualified distribution, any stock or
securities in the controlled corporation shall not be treated as
qualified property for purposes of subsection (c)(2) of this
section or section 361(c)(2).
(2) Disqualified distribution
For purposes of this subsection, the term ''disqualified
distribution'' means any distribution to which this section (or
so much of section 356 as relates to this section) applies if,
immediately after the distribution -
(A) any person holds disqualified stock in the distributing
corporation which constitutes a 50-percent or greater interest
in such corporation, or
(B) any person holds disqualified stock in the controlled
corporation (or, if stock of more than 1 controlled corporation
is distributed, in any controlled corporation) which
constitutes a 50-percent or greater interest in such
corporation.
(3) Disqualified stock
For purposes of this subsection, the term ''disqualified
stock'' means -
(A) any stock in the distributing corporation acquired by
purchase after October 9, 1990, and during the 5-year period
ending on the date of the distribution, and
(B) any stock in any controlled corporation -
(i) acquired by purchase after October 9, 1990, and during
the 5-year period ending on the date of the distribution, or
(ii) received in the distribution to the extent
attributable to distributions on -
(I) stock described in subparagraph (A), or
(II) any securities in the distributing corporation
acquired by purchase after October 9, 1990, and during the
5-year period ending on the date of the distribution.
(4) 50-percent or greater interest
For purposes of this subsection, the term ''50-percent or
greater interest'' means stock possessing at least 50 percent of
the total combined voting power of all classes of stock entitled
to vote or at least 50 percent of the total value of shares of
all classes of stock.
(5) Purchase
For purposes of this subsection -
(A) In general
Except as otherwise provided in this paragraph, the term
''purchase'' means any acquisition but only if -
(i) the basis of the property acquired in the hands of the
acquirer is not determined (I) in whole or in part by
reference to the adjusted basis of such property in the hands
of the person from whom acquired, or (II) under section
1014(a), and
(ii) the property is not acquired in an exchange to which
section 351, 354, 355, or 356 applies.
(B) Certain section 351 exchanges treated as purchases
The term ''purchase'' includes any acquisition of property in
an exchange to which section 351 applies to the extent such
property is acquired in exchange for -
(i) any cash or cash item,
(ii) any marketable stock or security, or
(iii) any debt of the transferor.
(C) Carryover basis transactions
If -
(i) any person acquires property from another person who
acquired such property by purchase (as determined under this
paragraph with regard to this subparagraph), and
(ii) the adjusted basis of such property in the hands of
such acquirer is determined in whole or in part by reference
to the adjusted basis of such property in the hands of such
other person,
such acquirer shall be treated as having acquired such property
by purchase on the date it was so acquired by such other
person.
(6) Special rule where substantial diminution of risk
(A) In general
If this paragraph applies to any stock or securities for any
period, the running of any 5-year period set forth in
subparagraph (A) or (B) of paragraph (3) (whichever applies)
shall be suspended during such period.
(B) Property to which suspension applies
This paragraph applies to any stock or securities for any
period during which the holder's risk of loss with respect to
such stock or securities, or with respect to any portion of the
activities of the corporation, is (directly or indirectly)
substantially diminished by -
(i) an option,
(ii) a short sale,
(iii) any special class of stock, or
(iv) any other device or transaction.
(7) Aggregation rules
(A) In general
For purposes of this subsection, a person and all persons
related to such person (within the meaning of section 267(b) or
707(b)(1)) shall be treated as one person.
(B) Persons acting pursuant to plans or arrangements
If two or more persons act pursuant to a plan or arrangement
with respect to acquisitions of stock or securities in the
distributing corporation or controlled corporation, such
persons shall be treated as one person for purposes of this
subsection.
(8) Attribution from entities
(A) In general
Paragraph (2) of section 318(a) shall apply in determining
whether a person holds stock or securities in any corporation
(determined by substituting ''10 percent'' for ''50 percent''
in subparagraph (C) of such paragraph (2) and by treating any
reference to stock as including a reference to securities).
(B) Deemed purchase rule
If -
(i) any person acquires by purchase an interest in any
entity, and
(ii) such person is treated under subparagraph (A) as
holding any stock or securities by reason of holding such
interest,
such stock or securities shall be treated as acquired by
purchase by such person on the later of the date of the
purchase of the interest in such entity or the date such stock
or securities are acquired by purchase by such entity.
(9) Regulations
The Secretary shall prescribe such regulations as may be
necessary to carry out the purposes of this subsection, including
-
(A) regulations to prevent the avoidance of the purposes of
this subsection through the use of related persons,
intermediaries, pass-thru entities, options, or other
arrangements, and
(B) regulations modifying the definition of the term
''purchase''.
(e) Recognition of gain on certain distributions of stock or
securities in connection with acquisitions
(1) General rule
If there is a distribution to which this subsection applies,
any stock or securities in the controlled corporation shall not
be treated as qualified property for purposes of subsection
(c)(2) of this section or section 361(c)(2).
(2) Distributions to which subsection applies
(A) In general
This subsection shall apply to any distribution -
(i) to which this section (or so much of section 356 as
relates to this section) applies, and
(ii) which is part of a plan (or series of related
transactions) pursuant to which 1 or more persons acquire
directly or indirectly stock representing a 50-percent or
greater interest in the distributing corporation or any
controlled corporation.
(B) Plan presumed to exist in certain cases
If 1 or more persons acquire directly or indirectly stock
representing a 50-percent or greater interest in the
distributing corporation or any controlled corporation during
the 4-year period beginning on the date which is 2 years before
the date of the distribution, such acquisition shall be treated
as pursuant to a plan described in subparagraph (A)(ii) unless
it is established that the distribution and the acquisition are
not pursuant to a plan or series of related transactions.
(C) Certain plans disregarded
A plan (or series of related transactions) shall not be
treated as described in subparagraph (A)(ii) if, immediately
after the completion of such plan or transactions, the
distributing corporation and all controlled corporations are
members of a single affiliated group (as defined in section
1504 without regard to subsection (b) thereof).
(D) Coordination with subsection (d)
This subsection shall not apply to any distribution to which
subsection (d) applies.
(3) Special rules relating to acquisitions
(A) Certain acquisitions not taken into account
Except as provided in regulations, the following acquisitions
shall not be taken into account in applying paragraph
(2)(A)(ii):
(i) The acquisition of stock in any controlled corporation
by the distributing corporation.
(ii) The acquisition by a person of stock in any controlled
corporation by reason of holding stock or securities in the
distributing corporation.
(iii) The acquisition by a person of stock in any successor
corporation of the distributing corporation or any controlled
corporation by reason of holding stock or securities in such
distributing or controlled corporation.
(iv) The acquisition of stock in the distributing
corporation or any controlled corporation to the extent that
the percentage of stock owned directly or indirectly in such
corporation by each person owning stock in such corporation
immediately before the acquisition does not decrease.
This subparagraph shall not apply to any acquisition if the
stock held before the acquisition was acquired pursuant to a
plan (or series of related transactions) described in paragraph
(2)(A)(ii).
(B) Asset acquisitions
Except as provided in regulations, for purposes of this
subsection, if the assets of the distributing corporation or
any controlled corporation are acquired by a successor
corporation in a transaction described in subparagraph (A),
(C), or (D) of section 368(a)(1) or any other transaction
specified in regulations by the Secretary, the shareholders
(immediately before the acquisition) of the corporation
acquiring such assets shall be treated as acquiring stock in
the corporation from which the assets were acquired.
(4) Definition and special rules
For purposes of this subsection -
(A) 50-percent or greater interest
The term ''50-percent or greater interest'' has the meaning
given such term by subsection (d)(4).
(B) Distributions in title 11 or similar case
Paragraph (1) shall not apply to any distribution made in a
title 11 or similar case (as defined in section 368(a)(3)).
(C) Aggregation and attribution rules
(i) Aggregation
The rules of paragraph (7)(A) of subsection (d) shall
apply.
(ii) Attribution
Section 318(a)(2) shall apply in determining whether a
person holds stock or securities in any corporation. Except
as provided in regulations, section 318(a)(2)(C) shall be
applied without regard to the phrase ''50 percent or more in
value'' for purposes of the preceding sentence.
(D) Successors and predecessors
For purposes of this subsection, any reference to a
controlled corporation or a distributing corporation shall
include a reference to any predecessor or successor of such
corporation.
(E) Statute of limitations
If there is a distribution to which paragraph (1) applies -
(i) the statutory period for the assessment of any
deficiency attributable to any part of the gain recognized
under this subsection by reason of such distribution shall
not expire before the expiration of 3 years from the date the
Secretary is notified by the taxpayer (in such manner as the
Secretary may by regulations prescribe) that such
distribution occurred, and
(ii) such deficiency may be assessed before the expiration
of such 3-year period notwithstanding the provisions of any
other law or rule of law which would otherwise prevent such
assessment.
(5) Regulations
The Secretary shall prescribe such regulations as may be
necessary to carry out the purposes of this subsection, including
regulations -
(A) providing for the application of this subsection where
there is more than 1 controlled corporation,
(B) treating 2 or more distributions as 1 distribution where
necessary to prevent the avoidance of such purposes, and
(C) providing for the application of rules similar to the
rules of subsection (d)(6) where appropriate for purposes of
paragraph (2)(B).
(f) Section not to apply to certain intragroup distributions
Except as provided in regulations, this section (or so much of
section 356 as relates to this section) shall not apply to the
distribution of stock from 1 member of an affiliated group (as
defined in section 1504(a)) to another member of such group if such
distribution is part of a plan (or series of related transactions)
described in subsection (e)(2)(A)(ii) (determined after the
application of subsection (e)).
(g) Section Not to Apply to Distributions Involving Disqualified
Investment Corporations.--
(1) In general.--This section (and so much of section 356
as relates to this section) shall not apply to any distribution
which is part of a transaction if--
(A) either the distributing corporation or
controlled corporation is, immediately after the
transaction, a disqualified investment corporation, and
(B) any person holds, immediately after the
transaction, a 50-percent or greater interest in any
disqualified investment corporation, but only if such
person did not hold such an interest in such corporation
immediately before the transaction.
(2) Disqualified investment corporation.--For purposes of
this subsection--
(A) In general.--The term `disqualified investment
corporation' means any distributing or controlled
corporation if the fair market value of the investment
assets of the corporation is--
(i) in the case of distributions after the
end of the 1-year period beginning on the date of
the enactment of this subsection, \2/3\ or more of
the fair market value of all assets of the
corporation, and
(ii) in the case of distributions during
such 1-year period, \3/4\ or more of the fair
market value of all assets of the corporation.
(B) Investment assets.--
(i) In general.--Except as otherwise
provided in this subparagraph, the term
`investment assets' means--
(I) cash,
(II) any stock or securities in a corporation,
(III) any interest in a partnership,
(IV) any debt instrument or other
evidence of indebtedness,
(V) any option, forward or futures
contract, notional principal contract,
or derivative,
(VI) foreign currency, or
(VII) any similar asset.
(ii) Exception for assets used in active
conduct of certain financial trades or
businesses.--Such term shall not include any asset
which is held for use in the active and regular
conduct of--
(I) a lending or finance business
(within the meaning of section 954(h)(4)),
(II) a banking business through a
bank (as defined in section 581), a
domestic building and loan association
(within the meaning of section
7701(a)(19)), or any similar institution
specified by the Secretary, or
(III) an insurance business if the
conduct of the business is licensed,
authorized, or regulated by an
applicable insurance regulatory body.
this clause <<NOTE: Applicability.>> shall only
apply with respect to any business if
substantially all of the income of the business is
derived from persons who are not related (within
the meaning of section 267(b) or 707(b)(1)) to the
person conducting the business.
(iii) Exception for securities marked to
market.--Such term shall not include any security
(as defined in section 475(c)(2)) which is held by
a dealer in securities and to which section 475(a)
applies.
(iv) Stock or securities in a 20-percent
controlled entity.--
(I) In general.--Such term shall
not include any stock and securities in,
or any asset described in subclause (IV)
or (V) of clause (i) issued by, a
corporation which is a 20-percent
controlled entity with respect to the
distributing or controlled corporation.
(II) Look-thru rule.--The
distributing or controlled corporation
shall, for purposes of applying this
subsection, be treated as owning its
ratable share of the assets of any 20-
percent controlled entity.
(III) <<NOTE: Applicability.>> 20-
percent controlled entity.--For purposes
of this clause, the term `20-percent
controlled entity' means, with respect
to any distributing or controlled
corporation, any corporation with
respect to which the distributing or
controlled corporation owns directly or
indirectly stock meeting the
requirements of section 1504(a)(2),
except that such section shall be
applied by substituting `20 percent' for
'80 percent' and without regard to stock
described in section 1504(a)(4).
(v) Interests in certain partnerships.--
(I) In general.--Such term shall
not include any interest in a
partnership, or any debt instrument or
other evidence of indebtedness, issued
by the partnership, if 1 or more of the
trades or businesses of the partnership
are (or, without regard to the 5-year
requirement under subsection (b)(2)(B),
would be) taken into account by the
distributing or controlled corporation,
as the case may be, in determining
whether the requirements of subsection
(b) are met with respect to the distribution.
(II) Look-thru rule.--The
distributing or controlled corporation
shall, for purposes of applying this
subsection, be treated as owning its
ratable share of the assets of any
partnership described in subclause (I).
(3) 50-percent or greater interest.--For purposes of this
subsection--
(A) In general.--The term `50-percent or greater
interest' has the meaning given such term by subsection
(d)(4).
(B) Attribution rules.--
The <<NOTE: Applicability.>> rules of section 318 shall
apply for purposes of determining ownership of stock for
purposes of this paragraph.
(4) Transaction.--For purposes of this subsection, the
term `transaction' includes a series of transactions.
(5) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out, or prevent the
avoidance of, the purposes of this subsection, including
regulations--
(A) to carry out, or prevent the avoidance of, the
purposes of this subsection in cases involving--
(i) the use of related persons,
intermediaries, pass-thru entities, options, or
other arrangements, and
(ii) the treatment of assets unrelated to
the trade or business of a corporation as
investment assets if, prior to the distribution,
investment assets were used to acquire such
unrelated assets,
(B) which in appropriate cases exclude from the
application of this subsection a distribution which does
not have the character of a redemption which would be
treated as a sale or exchange under section 302, and
(C) which modify the application of the
attribution rules applied for purposes of this subsection.
Sources
(Aug. 16, 1954, ch. 736, 68A Stat. 113; Pub. L. 94-455, title XIX,
Sec. 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 96-589,
Sec. 4(e)(2), Dec. 24, 1980, 94 Stat. 3403; Pub. L. 100-203, title
X, Sec. 10223(b), Dec. 22, 1987, 101 Stat. 1330-411; Pub. L.
100-647, title I, Sec. 1018(d)(5)(C), title II, Sec. 2004(k)(1),
Nov. 10, 1988, 102 Stat. 3580, 3605; Pub. L. 101-508, title XI,
Sec. 11321(a), 11702(e)(2), Nov. 5, 1990, 104 Stat. 1388-460,
1388-515; Pub. L. 104-188, title I, Sec. 1704(t)(31), Aug. 20,
1996, 110 Stat. 1889; Pub. L. 105-34, title X, Sec. 1012(a),
(b)(1), 1014(c), (e)(1), (2), Aug. 5, 1997, 111 Stat. 914, 916,
921; Pub. L. 105-206, title VI, Sec. 6010(c)(2), July 22, 1998, 112
Stat. 813.)
Miscellaneous
AMENDMENTS
2007 - PL 110-172
(b) Amendments Related to Section 202 of the Act.--
(1) Subparagraph (A) of section 355(b)(2) <<NOTE: 26 USC
355.>> is amended to read as follows:
``(A) it is engaged in the active conduct of a trade
or business,''.
(2) Paragraph (3) of section 355(b) is amended to read as
follows:
``(3) Special rules for determining active conduct in the
case of affiliated groups.--
``(A) In general.--For purposes of determining
whether a corporation meets the requirements of
paragraph (2)(A), all members of such corporation's
separate affiliated group shall be treated as one
corporation.
``(B) Separate affiliated group.--For purposes of
this paragraph, the term `separate affiliated group'
means, with respect to any corporation, the affiliated
group which would be determined under section 1504(a) if
such corporation were the common parent and section
1504(b) did not apply.
``(C) Treatment of trade or business conducted by
acquired member.--If a corporation became a member of a
separate affiliated group as a result of one or more
transactions in which gain or loss was recognized in
whole or in part, any trade or business conducted by
such corporation (at the time that such corporation
became such a member) shall be treated for purposes of
paragraph (2) as acquired in a transaction in which gain
or loss was recognized in whole or in part.
``(D) Regulations.--The Secretary shall prescribe
such regulations as are necessary or appropriate to
carry out the purposes of this paragraph, including
regulations which provide for the proper application of
subparagraphs (B), (C), and (D) of paragraph (2), and
modify the application of subsection (a)(3)(B), in
connection with the application of this paragraph.''.
(3) <<NOTE: Applicability. 26 USC 355 note.>> The Internal
Revenue Code of 1986 shall be applied and administered as if the
amendments made by section 202 of the Tax Increase Prevention
and Reconciliation Act of 2005 and by section 410 of division A
of the Tax Relief and Health Care Act of 2006 had never been
enacted.
2006 - Tax Relief and Health Care Act of 2006 (P.L. 109-432)
SEC. 410. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER SECTION 355
MADE PERMANENT.
(a) In General.--Subparagraphs (A) and (D) of section 355(b)(3) are
each amended by striking ``and on or before December 31, 2010''.
2006 - P.L. 109-222
SEC. 507. SECTION 355 NOT TO APPLY TO DISTRIBUTIONS INVOLVING
DISQUALIFIED INVESTMENT COMPANIES.
(a) In General.--
Section <<NOTE: 26 USC 355.>> 355 (relating to distributions
of stock and securities of a controlled corporation) is amended
by adding at the end the following new subsection:
``(g) Section Not to Apply to Distributions Involving Disqualified
Investment Corporations.--
``(1) In general.--This section (and so much of section 356
as relates to this section) shall not apply to any distribution
which is part of a transaction if--
``(A) either the distributing corporation or
controlled corporation is, immediately after the
transaction, a disqualified investment corporation, and
``(B) any person holds, immediately after the
transaction, a 50-percent or greater interest in any
disqualified investment corporation, but only if such
person did not hold such an interest in such corporation
immediately before the transaction.
``(2) Disqualified investment corporation.--For purposes of
this subsection--
``(A) In general.--The term `disqualified investment
corporation' means any distributing or controlled
corporation if the fair market value of the investment
assets of the corporation is--
``(i) in the case of distributions after the
end of the 1-year period beginning on the date of
the enactment of this subsection, \2/3\ or more of
the fair market value of all assets of the
corporation, and
``(ii) in the case of distributions during
such 1-year period, \3/4\ or more of the fair
market value of all assets of the corporation.
``(B) Investment assets.--
``(i) In general.--Except as otherwise
provided in this subparagraph, the term
`investment assets' means--
``(I) cash,
``(II) any stock or securities in a
corporation,
``(III) any interest in a
partnership,
``(IV) any debt instrument or other
evidence of indebtedness,
``(V) any option, forward or futures
contract, notional principal contract,
or derivative,
``(VI) foreign currency, or
``(VII) any similar asset.
``(ii) Exception for assets used in active
conduct of certain financial trades or
businesses.--Such term shall not include any asset
which is held for use in the active and regular
conduct of--
``(I) a lending or finance business
(within the meaning of section
954(h)(4)),
``(II) a banking business through a
bank (as defined in section 581), a
domestic building and loan association
(within the meaning of section
7701(a)(19)), or any similar institution
specified by the Secretary, or
``(III) an insurance business if the
conduct of the business is licensed,
authorized, or regulated by an
applicable insurance regulatory body.
This clause <<NOTE: Applicability.>> shall only
apply with respect to any business if
substantially all of the income of the business is
derived from persons who are not related (within
the meaning of section 267(b) or 707(b)(1)) to the
person conducting the business.
``(iii) Exception for securities marked to
market.--Such term shall not include any security
(as defined in section 475(c)(2)) which is held by
a dealer in securities and to which section 475(a)
applies.
``(iv) Stock or securities in a 20-percent
controlled entity.--
``(I) In general.--Such term shall
not include any stock and securities in,
or any asset described in subclause (IV)
or (V) of clause (i) issued by, a
corporation which is a 20-percent
controlled entity with respect to the
distributing or controlled corporation.
``(II) Look-thru rule.--The
distributing or controlled corporation
shall, for purposes of applying this
subsection, be treated as owning its
ratable share of the assets of any 20-
percent controlled entity.
``(III) <<NOTE: Applicability.>> 20-
percent controlled entity.--For purposes
of this clause, the term `20-percent
controlled entity' means, with respect
to any distributing or controlled
corporation, any corporation with
respect to which the distributing or
controlled corporation owns directly or
indirectly stock meeting the
requirements of section 1504(a)(2),
except that such section shall be
applied by substituting `20 percent' for
`80 percent' and without regard to stock
described in section 1504(a)(4).
``(v) Interests in certain partnerships.--
``(I) In general.--Such term shall
not include any interest in a
partnership, or any debt instrument or
other evidence of indebtedness, issued
by the partnership, if 1 or more of the
trades or businesses of the partnership
are (or, without regard to the 5-year
requirement under subsection (b)(2)(B),
would be) taken into account by the
distributing or controlled corporation,
as the case may be, in determining
whether the requirements of subsection
(b) are met with respect to the
distribution.
``(II) Look-thru rule.--The
distributing or controlled corporation
shall, for purposes of applying this
subsection, be treated as owning its
ratable share of the assets of any
partnership described in subclause (I).
``(3) 50-percent or greater interest.--For purposes of this
subsection--
``(A) In general.--The term `50-percent or greater
interest' has the meaning given such term by subsection
(d)(4).
``(B) Attribution rules.--
The <<NOTE: Applicability.>> rules of section 318 shall
apply for purposes of determining ownership of stock for
purposes of this paragraph.
``(4) Transaction.--For purposes of this subsection, the
term `transaction' includes a series of transactions.
``(5) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out, or prevent the
avoidance of, the purposes of this subsection, including
regulations--
``(A) to carry out, or prevent the avoidance of, the
purposes of this subsection in cases involving--
``(i) the use of related persons,
intermediaries, pass-thru entities, options, or
other arrangements, and
``(ii) the treatment of assets unrelated to
the trade or business of a corporation as
investment assets if, prior to the distribution,
investment assets were used to acquire such
unrelated assets,
``(B) which in appropriate cases exclude from the
application of this subsection a distribution which does
not have the character of a redemption which would be
treated as a sale or exchange under section 302, and
``(C) which modify the application of the
attribution rules applied for purposes of this
subsection.''.
(b) Effective <<NOTE: 26 USC 355 note.>> Dates.--
(1) In general.--The amendments made by this section shall
apply to distributions after the date of the enactment of this
Act.
(2) Transition rule.--The amendments made by this section
shall not apply to any distribution pursuant to a transaction
which is--
(A) made pursuant to an agreement which was binding
on such date of enactment and at all times thereafter,
(B) described in a ruling request submitted to the
Internal Revenue Service on or before such date, or
(C) described on or before such date in a public
announcement or in a filing with the Securities and
Exchange Commission.
2006 - P.L. 109-222:
SEC. 202. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER SECTION 355.
Subsection (b) of <<NOTE: 26 USC 355.>> section 355 (defining active
conduct of a trade or business) is amended by adding at the end the
following new paragraph:
``(3) Special rule relating to active business
requirement.--
``(A) In general.--In the case of any distribution
made after the date of the enactment of this paragraph
and on or before December 31, 2010, a corporation shall
be treated as meeting the requirement of paragraph
(2)(A) if and only if such corporation is engaged in the
active conduct of a trade or business.
``(B) Affiliated group rule.--For purposes of
subparagraph (A), all members of such corporation's
separate affiliated group shall be treated as one
corporation. For purposes of the preceding sentence, a
corporation's separate affiliated group is the
affiliated group which would be determined under section
1504(a) if such corporation were the common parent and
section 1504(b) did not apply.
``(C) Transition rule.--Subparagraph (A) shall not
apply to any distribution pursuant to a transaction
which is--
``(i) made pursuant to an agreement which was
binding on the date of the enactment of this
paragraph and at all times thereafter,
``(ii) described in a ruling request submitted
to the Internal Revenue Service on or before such
date, or
``(iii) described on or before such date in a
public announcement or in a filing with the
Securities and Exchange Commission.
The preceding sentence shall not apply if the
distributing corporation elects not to have such
sentence apply to distributions of such corporation. Any
such election, once made, shall be irrevocable.
``(D) Special rule for certain pre-enactment
distributions.--For purposes of determining the
continued qualification under paragraph (2)(A) of
distributions made on or before the date of the
enactment of this paragraph as a result of an
acquisition, disposition, or other restructuring after
such date and on or before December 31, 2010, such
distribution shall be treated as made on the date of
such acquisition, disposition, or restructuring for
purposes of applying subparagraphs (A) through (C) of
this paragraph.''.
1998 - Subsec. (e)(3)(A). Pub. L. 105-206, Sec. 6010(c)(2)(A),
substituted ''shall not be taken into account in applying'' for
''shall not be treated as described in'' in introductory
provisions.
Subsec. (e)(3)(A)(iv). Pub. L. 105-206, Sec. 6010(c)(2)(B), added
cl. (iv) and struck out former cl. (iv) which read as follows:
''The acquisition of stock in a corporation if shareholders owning
directly or indirectly stock possessing -
''(I) more than 50 percent of the total combined voting power
of all classes of stock entitled to vote, and
''(II) more than 50 percent of the total value of shares of all
classes of stock,
in the distributing corporation or any controlled corporation
before such acquisition own directly or indirectly stock possessing
such vote and value in such distributing or controlled corporation
after such acquisition.''
1997 - Subsec. (a)(3)(C). Pub. L. 105-34, Sec. 1014(e)(1),
inserted ''(including nonqualified preferred stock, as defined in
section 351(g)(2))'' after ''stock''.
Subsec. (a)(3)(D). Pub. L. 105-34, Sec. 1014(c), added subpar.
(D).
Subsec. (a)(4)(A). Pub. L. 105-34, Sec. 1014(e)(2), inserted
''nonqualified preferred stock and'' after ''subsection
(including''.
Subsec. (e). Pub. L. 105-34, Sec. 1012(a), added subsec. (e).
Subsec. (f). Pub. L. 105-34, Sec. 1012(b)(1), added subsec. (f).
1996 - Subsec. (d)(7)(A). Pub. L. 104-188 inserted ''section''
before ''267(b)''.
1990 - Subsec. (c). Pub. L. 101-508, Sec. 11321(a), added subsec.
(c) and struck out former subsec. (c) which read as follows:
''(1) In general. - Except as provided in paragraph (2), no gain
or loss shall be recognized to a corporation on any distribution to
which this section (or so much of section 356 as relates to this
section) applies and which is not in pursuance of a plan of
reorganization.
''(2) Distribution of appreciated property. -
''(A) In general. - If -
''(i) in a distribution referred to in paragraph (1), the
corporation distributes property other than stock or securities
in the controlled corporation, and
''(ii) the fair market value of such property exceeds its
adjusted basis (in the hands of the distributing corporation),
then gain shall be recognized to the distributing corporation as
if such property were sold to the distributee at its fair market
value.
''(B) Treatment of liabilities. - If any property distributed
in the distribution referred to in paragraph (1) is subject to a
liability or the shareholder assumes a liability of the
distributing corporation in connection with the distribution,
then, for purposes of subparagraph (A), the fair market value of
such property shall be treated as not less than the amount of
such liability.
''(3) Coordination with sections 311 and 336(a). - Sections 311
and 336(a) shall not apply to any distribution referred to in
paragraph (1).''
Pub. L. 101-508, Sec. 11702(e)(2), amended subsec. (c)
generally. Prior to amendment, subsec. (c) read as follows:
''Section 311 shall apply to any distribution -
''(1) to which this section (or so much of section 356 as
relates to this section) applies, and
''(2) which is not in pursuance of a plan of reorganization,
in the same manner as if such distribution were a distribution to
which subpart A of part I applies; except that subsection (b) of
section 311 shall not apply to any distribution of stock or
securities in the controlled corporation.''
Subsec. (d). Pub. L. 101-508, Sec. 11321(a), added subsec. (d).
1988 - Subsec. (b)(2)(D)(i), (ii). Pub. L. 100-647, Sec.
2004(k)(1), added cls. (i) and (ii) and struck out former cls. (i)
and (ii) which read as follows:
''(i) was not acquired by any distributee corporation directly
(or through 1 or more corporations, whether through the
distributing corporation or otherwise) within the period described
in subparagraph (B), or
''(ii) was so acquired such distributee corporation within such
period, but such control was so acquired only by reason of
transactions in which gain or loss was not recognized in whole or
in part, or only by reason of such transactions combined with
acquisitions before the beginning of such period.''
Subsec. (c). Pub. L. 100-647, Sec. 1018(d)(5)(C), added subsec.
(c).
1987 - Subsec. (b)(2)(D). Pub. L. 100-203, Sec. 10223(b)(3),
inserted at end ''For purposes of subparagraph (D), all distributee
corporations which are members of the same affiliated group (as
defined in section 1504(a) without regard to section 1504(b)) shall
be treated as 1 distributee corporation.''
Subsec. (b)(2)(D)(i). Pub. L. 100-203, Sec. 10223(b)(1), amended
cl. (i) generally. Prior to amendment, cl. (i) read as follows:
''was not acquired directly (or through one or more corporations)
by another corporation within the period described in subparagraph
(B), or''.
Subsec. (b)(2)(D)(ii). Pub. L. 100-203, Sec. 10223(b)(2),
substituted ''such distributee corporation'' for ''by another
corporation''.
1980 - Subsec. (a)(3). Pub. L. 96-589 designated existing
provisions as subpars. (A) and (B) and added subpar. (C).
Subsec. (a)(4). Pub. L. 96-589, Sec. 4(e)(2), designated existing
provisions as subpar. (A), substituted ''exchange if any property''
for ''distribution if any property'', inserted provisions excluding
property to which paragraph (3)(C) applies, and added subpar. (B).
1976 - Subsec. (a)(1)(D)(ii). Pub. L. 94-455 struck out ''or his
delegate'' after ''Secretary''.
EFFECTIVE DATE OF 2006 AMENDMENT
2006 - Tax Relief and Health Care Act of 2006 (P.L. 109-432)
SEC. 410(b) Effective Date.--The <<NOTE: 26 USC 355 note.>> amendments made
by this section shall take effect as if included in section 202 of the
Tax Increase Prevention and Reconciliation Act of 2005.
EFFECTIVE DATE OF 2007 AMENDMENT
2007 - PL 110-172
(d) Effective <<NOTE: Applicability. 26 USC 355 note.>> Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall take
effect as if included in the provisions of the Tax Increase
Prevention and Reconciliation Act of 2005 to which they relate.
(2) Modification of active business definition under section
355.--
(A) In general.--Except as otherwise provided in
this paragraph, the amendments made by subsection (b)
shall apply to distributions made after May 17, 2006.
(B) Transition rule.--The amendments made by
subsection (b) shall not apply to any distribution
pursuant to a transaction which is--
(i) made pursuant to an agreement which was
binding on May 17, 2006, and at all times
thereafter,
(ii) described in a ruling request submitted
to the Internal Revenue Service on or before such
date, or
(iii) described on or before such date in a
public announcement or in a filing with the
Securities and Exchange Commission.
(C) Election out of transition rule.--Subparagraph
(B) shall not apply if the distributing corporation
elects not to have such subparagraph apply to
distributions of such corporation. Any such election,
once made, shall be irrevocable.
(D) Special rule for certain pre-enactment
distributions.--For purposes of determining the
continued qualification under section 355(b)(2)(A) of
the Internal Revenue Code of 1986 of distributions made
on or before May 17, 2006, as a result of an
acquisition, disposition, or other restructuring after
such date, such distribution shall be treated as made on
the date of such acquisition, disposition, or
restructuring for purposes of applying subparagraphs (A)
through (C) of this paragraph. The preceding sentence
shall only apply with respect to the corporation that
undertakes such acquisition, disposition, or other
restructuring, and only if such application results in
continued qualification under section 355(b)(2)(A) of
such Code.
(3) Amendment related to section 515 of the act.--The
amendment made by subsection (c) shall apply to taxable years
beginning after December 31, 2006.
EFFECTIVE DATE OF 2006 AMENDMENT
SEC. 507. SECTION 355 NOT TO APPLY TO DISTRIBUTIONS INVOLVING
DISQUALIFIED INVESTMENT COMPANIES.
(b) Effective <<NOTE: 26 USC 355 note.>> Dates.--
(1) In general.--The amendments made by this section shall
apply to distributions after the date of the enactment of this
Act.
(2) Transition rule.--The amendments made by this section
shall not apply to any distribution pursuant to a transaction
which is--
(A) made pursuant to an agreement which was binding
on such date of enactment and at all times thereafter,
(B) described in a ruling request submitted to the
Internal Revenue Service on or before such date, or
(C) described on or before such date in a public
announcement or in a filing with the Securities and
Exchange Commission.
EFFECTIVE DATE OF 1998 AMENDMENT
Amendment by Pub. L. 105-206 effective, except as otherwise
provided, as if included in the provisions of the Taxpayer Relief
Act of 1997, Pub. L. 105-34, to which such amendment relates, see
section 6024 of Pub. L. 105-206, set out as a note under section 1
of this title.
EFFECTIVE DATE OF 1997 AMENDMENT
Amendment by section 1012(a), (b)(1) of Pub. L. 105-34
applicable, with transition rule, to distributions after Apr. 16,
1997, except that amendment by section 1012(a) applicable to such
distributions only if pursuant to a plan (or series of related
transactions) which involves an acquisition described in subsec.
(e)(2)(A)(ii) of this section occurring after such date, see
section 1012(d) of Pub. L. 105-34, as amended, set out as a note
under section 351 of this title.
Amendment by section 1014(c), (e)(1), (2) of Pub. L. 105-34
applicable, with certain exceptions, to transactions after June 8,
1997, see section 1014(f) of Pub. L. 105-34, set out as a note
under section 351 of this title.
EFFECTIVE DATE OF 1990 AMENDMENT
Section 11321(c) of Pub. L. 101-508 provided that:
''(1) In general. - Except as otherwise provided in this
subsection, the amendments made by this section (amending this
section and section 361 of this title) shall apply to distributions
after October 9, 1990.
''(2) Binding contract exception. - The amendments made by this
section shall not apply to any distribution pursuant to a written
binding contract in effect on October 9, 1990, and at all times
thereafter before such distribution.
''(3) Transitional rules. - For purposes of subparagraphs (A) and
(B) of section 355(d)(3) of the Internal Revenue Code of 1986 (as
amended by subsection (a)), an acquisition shall be treated as
occurring on or before October 9, 1990, if -
''(A) such acquisition is pursuant to a written binding
contract in effect on October 9, 1990, and at all times
thereafter before such acquisition,
''(B) such acquisition is pursuant to a transaction which was
described in documents filed with the Securities and Exchange
Commission on or before October 9, 1990, or
''(C) such acquisition is pursuant to a transaction -
''(i) the material terms of which were described in a written
public announcement on or before October 9, 1990,
''(ii) which was the subject of a prior filing with the
Securities and Exchange Commission, and
''(iii) which is the subject of a subsequent filing with the
Securities and Exchange Commission before January 1, 1991.''
Amendment by section 11702(e)(2) of Pub. L. 101-508 effective as
if included in the provision of the Technical and Miscellaneous
Revenue Act of 1988, Pub. L. 100-647, to which such amendment
relates, see section 11702(j) of Pub. L. 101-508, set out as a note
under section 59 of this title.
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by section 1018(d)(5)(C) of Pub. L. 100-647 effective,
except as otherwise provided, as if included in the provision of
the Tax Reform Act of 1986, Pub. L. 99-514, to which such amendment
relates, see section 1019(a) of Pub. L. 100-647, set out as a note
under section 1 of this title.
Amendment by section 2004(k)(1) of Pub. L. 100-647 effective,
except as otherwise provided, as if included in the provisions of
the Revenue Act of 1987, Pub. L. 100-203, title X, to which such
amendment relates, see section 2004(u) of Pub. L. 100-647, set out
as a note under section 56 of this title.
EFFECTIVE DATE OF 1987 AMENDMENT
Amendment by Pub. L. 100-203 applicable to distributions or
transfers after Dec. 15, 1987, with exceptions for certain
distributee corporations and distributions covered by prior
transition rule, see section 10223(d) of Pub. L. 100-203, set out
as a note under section 304 of this title.
EFFECTIVE DATE OF 1980 AMENDMENT
Amendment by Pub. L. 96-589 applicable to bankruptcy cases or
similar judicial proceedings commencing after Dec. 31, 1980, and to
exchanges which occur after Dec. 31, 1980, and which do not occur
in a bankruptcy case or similar judicial proceeding or in a
proceeding under Title 11, Bankruptcy, commenced on or before Dec.
31, 1980, with an exception permitting the debtor to make the
amendment applicable to such cases, proceedings or exchanges
commencing after Sept. 30, 1979, see section 7(c), (f) of Pub. L.
96-589, set out as a note under section 108 of this title.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 83, 108, 306, 312, 338,
346, 351, 355, 356, 358, 361, 367, 368, 424, 815, 877, 995, 1223,
1248, 1276, 2107, 2501, 6038B, 6166 of this title.
