26 USC 355 - Distribution of stock and securities of a controlled corporation

U.S Code last checked for updates: Sep 27, 2025

§ 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

(D)

Nonqualified preferred stock

(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

(B)

Separate affiliated group

(C)

Treatment of trade or business conducted by acquired member

(D)

Regulations

(c)

Taxability of corporation on distribution

(1)

In general

(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

(C)

Treatment of liabilities

(3)

Coordination with sections 311 and 336(a)

(d)

Recognition of gain on certain distributions of stock or securities in controlled corporation

(1)

In general

(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 during the 5-year period ending on the date of the distribution, and

(B)

any stock in any controlled corporation—

(i)

acquired by purchase 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 during the 5-year period ending on the date of the distribution.

(4)

50-percent or greater interest

(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

(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

(B)

Persons acting pursuant to plans or arrangements

(8)

Attribution from entities

(A)

In general

(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

(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

(C)

Certain plans disregarded

(D)

Coordination with subsection (d)

(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

(4)

Definition and special rules

For purposes of this subsection—

(A)

50-percent or greater interest

(B)

Distributions in title 11 or similar case

(C)

Aggregation and attribution rules

(i)

Aggregation

(ii)

Attribution

(D)

Successors and predecessors

(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

(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, ⅔ 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, ¾ 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 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

(iv)

Stock or securities in a 20-percent controlled entity

(I)

In general

(II)

Look-thru rule

(III)

20-percent controlled entity

(v)

Interests in certain partnerships

(I)

In general

(II)

Look-thru rule

(3)

50-percent or greater interest

For purposes of this subsection—

(A)

In general

(B)

Attribution rules

(4)

Transaction

(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.

(h)

Restriction on distributions involving real estate investment trusts

(1)

In general

(2)

Exceptions for certain distributions

(A)

Distributions of a real estate investment trust by another real estate investment trust

(B)

Distributions of certain taxable REIT subsidiaries

Paragraph (1) shall not apply to any distribution if—

(i)

the distributing corporation has been a real estate investment trust at all times during the 3-year period ending on the date of such distribution,

(ii)

the controlled corporation has been a taxable REIT subsidiary (as defined in section 856(l)) of the distributing corporation at all times during such period, and

(iii)

the distributing corporation had control (as defined in section 368(c) applied by taking into account stock owned directly or indirectly, including through one or more corporations or partnerships, by the distributing corporation) of the controlled corporation at all times during such period.

A controlled corporation will be treated as meeting the requirements of clauses (ii) and (iii) if the stock of such corporation was distributed by a taxable REIT subsidiary in a transaction to which this section (or so much of section 356 as relates to this section) applies and the assets of such corporation consist solely of the stock or assets held by one or more taxable REIT subsidiaries of the distributing corporation meeting the requirements of clauses (ii) and (iii). For purposes of clause (iii), control of a partnership means ownership of at least 80 percent of the profits interest and at least 80 percent of the capital interests.

(Aug. 16, 1954, ch. 736, 68A Stat. 113; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 96–589, § 4(e)(2), Dec. 24, 1980, 94 Stat. 3403; Pub. L. 100–203, title X, § 10223(b), Dec. 22, 1987, 101 Stat. 1330–411; Pub. L. 100–647, title I, § 1018(d)(5)(C), title II, § 2004(k)(1), Nov. 10, 1988, 102 Stat. 3580, 3605; Pub. L. 101–508, title XI, §§ 11321(a), 11702(e)(2), Nov. 5, 1990, 104 Stat. 1388–460, 1388–515; Pub. L. 104–188, title I, § 1704(t)(31), Aug. 20, 1996, 110 Stat. 1889; Pub. L. 105–34, title X, §§ 1012(a), (b)(1), 1014(c), (e)(1), (2), Aug. 5, 1997, 111 Stat. 914, 916, 921; Pub. L. 105–206, title VI, § 6010(c)(2), July 22, 1998, 112 Stat. 813; Pub. L. 109–222, title II, § 202, title V, § 507(a), May 17, 2006, 120 Stat. 348, 358;

cite as: 26 USC 355