Exchanges of Multiple Stocks and Securities in Corporate Divisions or Acquisitive Reorganizations

If specified conditions are satisfied, the Internal Revenue Code provides nonrecognition for gain or loss realized when stocks and securities of one corporation are exchanged for stocks and securities of another corporation. When the exchange is made as part of a corporate division (a split-off or a split-up), the principal nonrecognition provision is section 355; and when the exchange is made as part of an acquisitive reorganization, the principal nonrecognition provision is section 354. Complete nonrecognition is provided only when stock is exchanged solely for stock and securities are exchanged solely for securities of no greater principal amount. If, in addition to receiving property that is permitted to be received without recognizing gain or loss, a taxpayer also receives other property (property that does not qualify for nonrecognition), the other property is sometimes referred to as ‘‘boot.’’ When a taxpayer receives both nonrecognition property and boot in either a qualified corporate division or an acquisitive reorganization, nonrecognition is not necessarily lost entirely. In those cases, except for a so-called ‘‘B’’ acquisitive reorganization, section 356 provides that no loss can be recognized, and that realized gain will be recognized only to the extent of the boot received. The determination of whether any recognized gain is to be characterized as capital gain or as ordinary income turns on the operation of section 356(a)(2) and is not discussed in this article