§ 1.355-8T - Definition of predecessor and successor and limitations on gain recognition under section 355(e) and section 355(f) (temporary).

§ 1.355-8T Definition of predecessor and successor and limitations on gain recognition under section 355(e) and section 355(f) (temporary).

(a) In general -

(1) Scope. This section provides rules under section 355(e)(4)(D) to determine whether a corporation is treated as a predecessor or successor of a distributing corporation (Distributing) or a controlled corporation (Controlled) for purposes of section 355(e). This section also provides rules limiting the amount of Distributing's gain recognized under section 355(e) on the distribution of Controlled stock if section 355(e) applies to an acquisition by one or more persons, as part of a Plan (within the meaning of § 1.355-7 as modified by paragraph (a)(3) of this section), of stock that in the aggregate represents a 50-percent or greater interest (a Planned 50-percent Acquisition) of a Predecessor of Distributing (as defined in paragraph (b) of this section), or of Distributing. In addition, this section provides rules regarding the application of section 336(e) to a distribution to which this section applies and the application of section 355(f) to a distribution of Controlled stock in certain cases.

(2) Purpose. The rules in this section have two principal purposes. The first is to ensure that section 355(e) applies to a section 355 distribution if, as part of a Plan, some of the assets of a Predecessor of Distributing (as defined in paragraph (b)(1) of this section) are transferred directly or indirectly to Controlled without full recognition of gain, and the distribution accomplishes a division of the assets of the Predecessor of Distributing. The second is to ensure that section 355(e) applies when there is a Planned 50-percent Acquisition of a Successor of Distributing or Successor of Controlled (as defined in paragraph (c)(2) of this section). The rules of this section must be interpreted and applied in a manner that is consistent with and reasonably carries out the purposes of this section.

(3) Overview. This section applies if a distribution of Controlled stock (or stock and securities) is part of the same Plan that includes a Planned 50-percent Acquisition of a Predecessor of Distributing, Distributing, Controlled, a Successor of Distributing, or a Successor of Controlled. Paragraph (a)(4) of this section provides rules regarding references to the terms Distributing, Controlled, distribution, Plan, and Plan Period for purposes of section 355(e), § 1.355-7, and this section. Paragraph (b) of this section defines the term Predecessor of Distributing and several related terms. A corporation generally will be a Predecessor of Distributing if: As part of a Plan, the distribution accomplishes a division of the assets that the corporation directly and indirectly held during the Plan Period; that division occurs through transfers, as part of a Plan, resulting in Controlled directly or indirectly holding some but not all of those assets immediately after the distribution; and all of the gain on that corporation's assets directly or indirectly held by Controlled is not recognized before the distribution. In addition, a corporation generally will be a Predecessor of Distributing if: As part of a Plan, the distribution accomplishes a division of the assets that it directly and indirectly held during the Plan Period; that division occurs as a result of the direct or indirect transfer of Controlled stock by that corporation to Distributing without the transfer of all of the corporation's other assets to Controlled; and all of the gain on the corporation's assets (including the Controlled stock) directly or indirectly held by Controlled is not recognized before the distribution. In both cases, Controlled stock distributed in the distribution must reflect the basis of any Separated Property (as defined in paragraph (b)(2)(vii) of this section). Paragraph (c) of this section defines other terms, including Predecessor of Controlled and Successor (of Distributing or Controlled). Paragraph (d) of this section provides guidance with regard to acquisitions and deemed acquisitions of stock if there is a Predecessor of Distributing or a Successor of either Distributing or Controlled. Paragraph (e) of this section provides two rules that may limit the amount of Distributing's gain on the distribution of Controlled stock if there is a Predecessor of Distributing, as well as an overall gain limitation. Paragraph (e) of this section also provides guidance with respect to the application of section 336(e). Regardless of whether there is a predecessor or successor of Distributing or Controlled, paragraph (f) of this section provides a special rule relating to section 355(e)(2)(C), which provides that section 355(e) does not apply to certain transactions within an affiliated group (as defined in section 1504(a) without regard to section 1504(b)). Paragraph (g) of this section provides rules coordinating the application of section 355(f) with the rules of this section. Paragraph (h) of this section contains examples that illustrate the rules of this section.

(4) References -

(i) References to Distributing or Controlled. For purposes of section 355(e) and the regulations thereunder, except as otherwise provided in this section, any reference to Distributing or Controlled includes, as the context may require, a reference to any Predecessor of Distributing (as defined in paragraph (b)(1) of this section) or Predecessor of Controlled (as defined in paragraph (c)(1) of this section), respectively, or any Successor (as defined in paragraph (c)(2) of this section) of Distributing or Controlled, respectively. However, except as otherwise provided in this section, a reference to a Predecessor of Distributing or to a Successor of Distributing does not include a reference to Distributing, and a reference to a Predecessor of Controlled or to a Successor of Controlled does not include a reference to Controlled.

(ii) References to Plan or distribution. Except as otherwise provided in this section, references to a Plan in this section are references to a plan within the meaning of § 1.355-7. References to a distribution in § 1.355-7 include a reference to a distribution and other related pre-distribution transactions that together effect a division of the assets of a Predecessor of Distributing. In determining whether a distribution and a Planned 50-percent Acquisition of a predecessor or successor of Distributing or Controlled are part of a Plan, the rules of § 1.355-7 apply. In those cases, references to Distributing or Controlled in § 1.355-7 generally include references to a predecessor or successor of Distributing or Controlled. However, with regard to any possible Planned 50-percent Acquisition of a Predecessor of Distributing, any agreement, understanding, arrangement, or substantial negotiations with regard to the acquisition of the stock of the Predecessor of Distributing is analyzed under § 1.355-7 with regard to the actions of officers or directors of Distributing or Controlled, controlling shareholders (as defined in § 1.355-7(h)(3)) of Distributing or Controlled, or a person acting with permission of one of those parties. For that purpose, references in § 1.355-7 to Distributing do not include references to a Predecessor of Distributing. Therefore, the actions of officers or directors, or controlling shareholders of a Predecessor of Distributing, or a person acting with the implicit or explicit permission of one of those parties are not considered unless those parties otherwise would be treated as acting on behalf of Distributing or Controlled under § 1.355-7 (for example, if a Predecessor of Distributing is a controlling shareholder of Distributing).

(iii) Plan Period. For purposes of this section, the term Plan Period means the period that ends immediately after the distribution and begins on the earliest date on which any pre-distribution step that is part of the Plan is agreed to or understood, arranged, or substantially negotiated by one or more officers or directors acting on behalf of Distributing or Controlled, by controlling shareholders of Distributing or Controlled, or by another person or persons with the implicit or explicit permission of one or more of such officers, directors, or controlling shareholders. For purposes of the preceding sentence, references to Distributing and Controlled do not include references to any predecessor or successor of Distributing or Controlled.

(b) Predecessor of Distributing -

(1) Definition -

(i) In general. A Potential Predecessor (as defined in paragraph (b)(2)(ii) of this section) is a Predecessor of Distributing if, taking into account the special rules of paragraph (b)(2) of this section, the pre-distribution requirements of paragraph (b)(1)(ii) of this section and the post-distribution requirements of paragraph (b)(1)(iii) of this section are satisfied.

(ii) Pre-distribution requirements -

(A) Relevant Property. Before the distribution, and as part of a Plan, either -

(1) Any Controlled stock distributed in the distribution was directly or indirectly acquired (or deemed acquired under paragraph (b)(2)(x) of this section) by Distributing in exchange for any direct or indirect interest in Relevant Property (as defined in paragraph (b)(2)(iv) of this section) -

(i) That is held directly or indirectly by Controlled immediately before the distribution; and

(ii) The gain on which was not recognized in full as part of a Plan; or

(2) Any Controlled stock that is distributed in the distribution is Relevant Property of the Potential Predecessor, and the gain on that Controlled stock was not recognized in full as part of a Plan.

(B) Reflection of basis. Any Controlled stock distributed in the distribution reflects the basis of any Separated Property (as defined in paragraph (b)(2)(vii) of this section).

(iii) Post-distribution requirement. Immediately after the distribution, direct or indirect ownership of Relevant Property has been divided between Controlled on the one hand, and Distributing or the Potential Predecessor (or a successor of a Potential Predecessor) on the other hand. For purposes of this paragraph (b)(1)(iii), if Controlled stock that is distributed in the distribution is Relevant Property of a Potential Predecessor, then Controlled is deemed to have received Relevant Property of the Potential Predecessor.

(2) Additional definitions and rules related to paragraph (b)(1) of this section -

(i) References to Distributing and Controlled. For purposes of paragraphs (b)(1)(ii) and (b)(1)(iii) of this section, references to Distributing and Controlled do not include references to any predecessor or successor of Distributing or Controlled.

(ii) Potential Predecessor. The term Potential Predecessor means a corporation other than Distributing or Controlled.

(iii) Successors of Potential Predecessors. For purposes of paragraph (b)(1)(iii) of this section, if a Potential Predecessor transfers property in a section 381 transaction to a corporation (other than Distributing or Controlled) during the Plan Period, the corporation is a successor to the Potential Predecessor.

(iv) Relevant Property; Relevant Stock -

(A) In general. Except as otherwise provided in this paragraph (b)(2)(iv), the term Relevant Property means any property that was held, directly or indirectly, by the Potential Predecessor during the Plan Period. The term Relevant Stock means stock of a corporation if that stock is a Potential Predecessor's Relevant Property.

(B) Property held by Distributing. Except as provided in paragraph (b)(2)(iv)(C) of this section, property held directly or indirectly by Distributing (including Controlled stock) is Relevant Property of a Potential Predecessor only to the extent that the property was transferred directly or indirectly to Distributing during the Plan Period, and it was Relevant Property of the Potential Predecessor before the direct or indirect transfers. For example, if during the Plan Period a subsidiary corporation of a Potential Predecessor merges into Controlled in a reorganization under section 368(a)(1)(A) and (2)(D), and, as a result, the Potential Predecessor directly or indirectly owns Distributing stock received in the merger, the subsidiary's assets held by Controlled will be Relevant Property of that Potential Predecessor.

(C) Certain reorganizations. For purposes of paragraph (b)(2)(iv)(B) of this section, the transferor and transferee in any reorganization described in section 368(a)(1)(F) (F reorganization) are treated as a single corporation. Therefore, for example, Relevant Property acquired during the Plan Period by a corporation that is a transferor (as to a later F reorganization) is treated as having been acquired directly (and from the same source) by the transferee (as to the later F reorganization) during the Plan Period. In addition, any transfer (or deemed transfer) of assets to Distributing in an F reorganization will not cause the transferred assets to be treated as Relevant Property.

(v) Stock of Distributing as Relevant Property -

(A) In general. For purposes of paragraph (b)(1)(ii) of this section, except as provided in paragraph (b)(2)(v)(B) of this section, stock of Distributing is not Relevant Stock (and thus not Relevant Property) to the extent that the Potential Predecessor becomes, as part of a Plan, the direct or indirect owner of that stock as the result of the transfer to Distributing of direct or indirect interests in the Potential Predecessor's Relevant Property. For example, stock of Distributing is not Relevant Stock if it is acquired by a Potential Predecessor as part of a Plan in an exchange to which section 351(a) applies.

(B) Certain reorganizations. For purposes of paragraph (b)(1)(ii) of this section, stock of Distributing is Relevant Stock (and thus Relevant Property) to the extent that the Potential Predecessor becomes, as part of the Plan, the direct or indirect owner of that stock as the result of a transaction described in section 368(a)(1)(E).

(vi) Substitute Asset. The term Substitute Asset means any property that is held directly or indirectly by Distributing during the Plan Period and was received, during the Plan Period, in exchange for Relevant Property that was acquired directly or indirectly by Distributing if all gain on the transferred Relevant Property is not recognized on the exchange. For example, property received by Controlled in exchange for Relevant Property in a transaction qualifying under section 1031 is a Substitute Asset. Irrespective of the general rule of this paragraph (b)(2)(vi), stock of Controlled received in exchange for a direct or indirect transfer of Relevant Property by Distributing generally is not a Substitute Asset. However, if Controlled stock received or deemed received in an exchange reflects in whole or in part the basis of Relevant Stock the issuer of which ceases to exist for Federal income tax purposes under the Plan, then that Controlled stock will constitute a Substitute Asset. See paragraph (b)(2)(x) of this section. In addition, stock received by Distributing in a distribution qualifying under section 305(a) or section 355(a) on Relevant Stock is a Substitute Asset. For purposes of this section, a Substitute Asset is treated as Relevant Property with the same ownership and transfer history as the Relevant Property for which (or on which) it was received.

(vii) Separated Property. The term Separated Property means each item of Relevant Property that is described in paragraph (b)(1)(ii)(A) of this section. However, if Relevant Stock is Separated Property, Underlying Property (as defined in paragraph (b)(2)(viii) of this section) associated with that stock is not treated as Separated Property. In addition, if Distributing directly or indirectly acquires Relevant Stock in a transaction in which gain is recognized in full, Underlying Property associated with that stock is not treated as Separated Property.

(viii) Underlying Property. The term Underlying Property means property directly or indirectly held by a corporation that is the issuer of Relevant Stock.

(ix) Scope of definition of Predecessor of Distributing. If there are multiple Potential Predecessors that satisfy the requirements of paragraph (b)(1) of this section, each of those Potential Predecessors will be a Predecessor of Distributing. For example, a Potential Predecessor that transfers property to a Predecessor of Distributing without full recognition of gain (and that otherwise meets the requirements of paragraph (b)(1) of this section) is also a Predecessor of Distributing if the applicable transfer occurred as part of a Plan that existed at the time of such transfer.

(x) Deemed exchanges. For purposes of paragraph (b)(1)(ii) and (b)(2)(vi) of this section, Distributing is treated as acquiring Controlled stock in exchange for a direct or indirect interest in Relevant Property if the basis of Distributing in that Controlled stock reflects the basis of the Relevant Property in whole or in part.

(c) Additional definitions -

(1) Predecessor of Controlled. Solely for purposes of applying paragraph (f) of this section, a corporation is a Predecessor of Controlled if, before the distribution, it transfers property to Controlled in a section 381 transaction as part of a Plan. Other than for the purpose described in the preceding sentence, no corporation can be a Predecessor of Controlled. For purposes of this paragraph (c)(1), a reference to Controlled includes a reference to a Predecessor of Controlled. If multiple corporations satisfy the requirements of this paragraph (c)(1), each of those corporations will be a Predecessor of Controlled. For example, a corporation that transfers property to a Predecessor of Controlled in a section 381 transaction is also a Predecessor of Controlled if the section 381 transaction occurred as part of a Plan that existed at the time of such transaction.

(2) Successors -

(i) In general. A Successor of Distributing or Controlled, respectively, is a corporation to which Distributing or Controlled transfers property in a section 381 transaction after the distribution (a Successor Transaction).

(ii) Determination of Successor status. More than one corporation may be a Successor of Distributing or Controlled. Therefore, if Distributing transfers property to another corporation (X) in a section 381 transaction, and X transfers property to another corporation (Y) in a section 381 transaction, then each of X and Y may be a Successor of Distributing. In this case, the determination of whether Y is a Successor of Distributing is made after the determination of whether X is a Successor of Distributing.

(3) Section 381 transaction. The term section 381 transaction means a transaction to which section 381 applies.

(d) Special acquisition rules -

(1) Deemed acquisitions of stock in section 381 transactions. Each person that owned an interest in the acquiring corporation immediately before a section 381 transaction (an Acquiring Owner) is treated for purposes of this section as acquiring, in the section 381 transaction, stock representing an interest in the distributor or transferor corporation, to the extent that the Acquiring Owner did not hold an equivalent direct or indirect interest in the distributor or transferor corporation before the section 381 transaction. For example, if Distributing held a 25-percent interest in a Predecessor of Distributing before a section 381 transaction in which the Predecessor of Distributing transfers its assets to Distributing, each person that owns an interest in Distributing is treated as acquiring in the section 381 transaction a proportionate share of the remaining 75-percent interest in the Predecessor of Distributing. Similarly, each Acquiring Owner of a Successor of Distributing is treated as acquiring, in the Successor Transaction, stock of Distributing, to the extent that the Acquiring Owner did not hold an equivalent direct or indirect interest in Distributing before the section 381 transaction.

(2) Deemed acquisitions of stock after section 381 transactions. For purposes of this section, after a section 381 transaction (including a Successor Transaction), an acquisition of stock of an acquiring corporation (including a deemed stock acquisition under paragraph (d)(1) of this section) is treated also as an acquisition of an interest in the stock of the distributor or transferor corporation. For example, an acquisition of the stock of Distributing that occurs after a section 381 transaction is treated not only as an acquisition of the stock of Distributing, but also as an acquisition of the stock of any Predecessor of Distributing whose assets were acquired by Distributing in a prior section 381 transaction. Similarly, an acquisition of the stock of a Successor of Distributing that occurs after the Successor Transaction is treated not only as an acquisition of the stock of the Successor of Distributing, but also as an acquisition of the stock of Distributing.

(3) Separate counting for Distributing and each Predecessor of Distributing. The measurement of whether one or more persons have acquired stock of any specific corporation in a Planned 50-percent Acquisition is made separately from the measurement of any potential Planned 50-percent Acquisition of any other corporation. Therefore, there may be a Planned 50-percent Acquisition of a Predecessor of Distributing even if there is no Planned 50-percent Acquisition of Distributing. Similarly, there may be a Planned 50-percent Acquisition of Distributing even if there is no Planned 50-percent Acquisition of a Predecessor of Distributing.

(e) Special rules for gain recognition -

(1) In general. If there are Planned 50-percent Acquisitions of multiple corporations (for example, two Predecessors of Distributing), Distributing must recognize gain in the amount described in section 355(c)(2) or 361(c)(2) (the Statutory Recognition Amount), as applicable, with respect to each such corporation, subject to the limitations in paragraph (e)(2) of this section (relating to the Planned 50-percent Acquisition of a Predecessor of Distributing) and paragraph (e)(3) of this section (relating to the Planned 50-percent Acquisition of Distributing), if applicable. The limitations in paragraphs (e)(2) and (e)(3) of this section are applied separately to the Planned 50-percent Acquisition of each such corporation to determine the amount of gain required to be recognized. Paragraph (e)(4) of this section sets forth an overall limitation based on the full amount of gain otherwise required to be recognized by Distributing by reason of section 355(e). Paragraph (e)(5) of this section clarifies the availability of an election under section 336(e) with regard to certain distributions.

(2) Planned 50-percent or greater acquisitions of a Predecessor of Distributing -

(i) In general. If there is a Planned 50-percent Acquisition of a Predecessor of Distributing, the amount of gain recognized by Distributing by reason of section 355(e) as a result of the Planned 50-percent Acquisition is limited to the amount of gain, if any, that Distributing would have recognized if, immediately before the distribution, Distributing had engaged in the following transaction: Distributing transferred all Separated Property received from the Predecessor of Distributing to a newly-formed corporation in exchange solely for stock of such corporation in a reorganization under section 368(a)(1)(D) and then distributed the stock of such corporation to the shareholders of Distributing in a transaction to which section 355(e) applied (a Hypothetical D/355(e) Reorganization). This computation is applied regardless of whether Distributing actually directly held the Separated Property.

(ii) Operating rules. For purposes of applying paragraph (e)(2)(i) of this section, the following rules apply:

(A) Separated Property other than Controlled stock. The basis and fair market value of Separated Property other than stock of Controlled treated as transferred by Distributing to a hypothetical Controlled in a Hypothetical D/355(e) Reorganization equal the basis and fair market value, respectively, of such property in the hands of Controlled immediately before the distribution of Controlled stock.

(B) Controlled stock that is Separated Property. The basis and fair market value of the stock of Controlled that is Separated Property treated as transferred by Distributing to a hypothetical Controlled in a Hypothetical D/355(e) Reorganization equal the basis and fair market value, respectively, of such stock in the hands of Distributing immediately before the distribution of Controlled stock.

(C) Anti-duplication rule. A Predecessor of Distributing's Separated Property is taken into account for purposes of applying this paragraph (e)(2) only to the extent such property was not taken into account by Distributing in a Hypothetical D/355(e) Reorganization with respect to another Predecessor of Distributing. Further, appropriate adjustments must be made to prevent other duplicative inclusions of section 355(e) gain under this paragraph (e) reflecting the same economic gain.

(3) Planned 50-percent Acquisition of Distributing in a section 381 transaction. This paragraph (e)(3) applies if there is a Planned 50-percent Acquisition of Distributing (by application of paragraph (d)(1) of this section) that occurs as part of a Plan as the result of a transfer by a Predecessor of Distributing to Distributing in a section 381 transaction. In that case, the amount of gain recognized by Distributing by reason of section 355(e) as a result of the acquisition is the excess, if any, of the Statutory Recognition Amount, as applicable, over the amount of gain, if any, that Distributing would have been required to recognize under paragraph (e)(2) of this section if there had been a Planned 50-percent Acquisition of the Predecessor of Distributing, but not of Distributing, in the section 381 transaction. For purposes of this paragraph (e)(3), references to Distributing are not references to a Predecessor of Distributing.

(4) Overall gain recognition. The sum of the amounts required to be recognized by Distributing under section 355(e) and the regulations thereunder (taking into account paragraphs (e)(2) and (3) of this section) with regard to a single distribution will not exceed the Statutory Recognition Amount, as applicable. In addition, Distributing may choose not to apply the limitations of paragraph (e)(2) and (3) of this section to a distribution, and instead may recognize the Statutory Recognition Amount. Distributing indicates its choice to apply the preceding sentence by reporting the Statutory Recognition Amount on its original or amended Federal income tax return for the year of the distribution.

(5) Section 336(e) election. Distributing is not eligible to make a section 336(e) election with respect to a distribution to which this section applies unless Distributing would, absent the making of a section 336(e) election (as defined in § 1.336-1(b)(11)), recognize the Statutory Recognition Amount with respect to a distribution of Controlled stock under paragraph (e)(2), (e)(3), and (e)(4) (without regard to the final two sentences thereof) of this section. See §§ 1.336-1 through 1.336-5 for additional requirements with regard to a section 336(e) election.

(f) Predecessor or Successor as a member of the affiliated group. For purposes of section 355(e)(2)(C), if a corporation transfers its assets to a member of the same affiliated group (as defined in section 1504 without regard to section 1504(b)) in a section 381 transaction, the transferor will be treated as continuing in existence within the same affiliated group.

(g) Inapplicability of section 355(f) to certain intra-group distributions -

(1) In general. Section 355(f) does not apply to a distribution if there is a Planned 50-percent Acquisition of a Predecessor of Distributing (but not of Distributing, Controlled, or their Successors), except as provided in paragraph (g)(2) of this section. Therefore, except as provided in paragraph (g)(2) of this section, section 355 (or so much of section 356 as relates to section 355) and the regulations thereunder, including the gain limitation rules of paragraph (e)(2) of this section, apply, without regard to section 355(f), to the distribution of Controlled within an affiliated group if the distribution and the Planned 50-percent Acquisition of the Predecessor of Distributing are part of a Plan. For purposes of this paragraph (g)(1), references to the distribution (and Distributing and Controlled) include references to a distribution (and Distributing and Controlled) to which section 355 would apply but for the application of section 355(f).

(2) Alternative application of section 355(f). Distributing may choose not to apply paragraph (g)(1) of this section to each distribution (that occurs under a single Plan) to which section 355(f) would otherwise apply absent paragraph (g)(1) of this section and may instead apply section 355(f) to all such distributions according to its terms, but only if all members of the same affiliated group (as defined in section 1504(a) without regard to section 1504(b)) report consistently the Federal income tax consequences of the distributions that are part of the Plan (determined without regard to section 355(f)). In such a case, no gain limitation under paragraph (e)(2) or (3) of this section is available with regard to any applicable distribution. Distributing indicates its choice to apply section 355(f) consistently to all applicable distributions by reporting the Federal income tax consequences of each distribution in accordance with section 355(f) on its Federal income tax return for the year of the distribution.

(h) Examples. The following examples illustrate the principles of this section. Unless the facts indicate otherwise, assume throughout these examples that: Distributing (D) owns all the stock of Controlled (C), and none of the shares of C held by D has a built-in loss; D distributes the stock of C in a distribution to which section 355 applies, but to which section 355(d) does not apply; X, Y, and Z are individuals; each of D, D1, D2, C, P, P1, P2, and R is a corporation having one class of stock outstanding, and none is a member of a consolidated group; and each transaction that is part of a Plan defined in this section is respected as a separate transaction under general Federal income tax principles. No inference should be drawn from any example concerning whether any requirements of section 355 are satisfied other than those of section 355(e):

Example 1.

Predecessor of Distributing - (i) Facts. X owns 100% of the stock of P, which holds multiple assets. Y owns 100% of the stock of D. The following steps occur as part of a Plan: P merges into D in a reorganization under section 368(a)(1)(A). Immediately after the merger, X and Y own 10% and 90%, respectively, of the stock of D. D then contributes to C one of the assets (Asset 1) acquired from P in the merger. At the time of the contribution, Asset 1 has a basis of $40x and a fair market value of $110x. In exchange for Asset 1, D receives additional C stock and $10x. D distributes the stock of C (but not the cash) to X and Y, pro rata. The contribution and distribution constitute a reorganization under section 368(a)(1)(D), and D recognizes $10x of gain under section 361(b) on the contribution. Immediately before the distribution, taking into account the $10x of gain recognized by D on the contribution, Asset 1 has an adjusted basis of $50x under section 362(b) and a fair market value of $110x, and the stock of C held by D has a basis of $100x and a fair market value of $200x.

(ii) Analysis - (A) Predecessor. Under paragraph (b)(1) of this section, P is a Predecessor of D. Immediately before the distribution and as part of a Plan, C holds P Relevant Property (Asset 1) the gain on which was not recognized in full as part of a Plan. Further, some of the C stock distributed in the distribution was acquired by D in exchange for Asset 1, and it reflects the basis of Separated Property (Asset 1). In addition, immediately after the distribution, D continues to hold Relevant Property of P. Therefore, P's Relevant Property has been divided between C and D.

(B) Acquisition of predecessor stock. Under paragraph (d)(1) of this section, Y is treated as acquiring stock representing 90% of the voting power and value of P as a result of the merger of P into D. Accordingly, there has been a Planned 50-percent Acquisition of P.

(C) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $100x of gain ($200x of aggregate fair market value minus $100x of aggregate basis of the C stock held by D), the Statutory Recognition Amount described in section 361(c)(2). However, under paragraph (e)(2) of this section, D's gain recognized by reason of the deemed acquisition of P stock will not exceed $60x, an amount equal to the amount of gain D would have recognized had D transferred Asset 1 (Separated Property) to a newly-formed corporation (C1) solely for C1 stock and distributed the C1 stock to D's shareholders in a Hypothetical D/355(e) Reorganization. For purposes of this computation, the basis and fair market value of Asset 1 equal the basis and fair market value of Asset 1 in the hands of C immediately before the distribution of C stock. Under section 361(c)(2), D would recognize $60x of gain, an amount equal to the gain in the hypothetical C1 stock (excess of the $110x fair market value over the $50x basis). Therefore, D recognizes $60x of gain.

(iii) Plan not in existence at time of acquisition of Potential Predecessor's Property. The facts are the same as in paragraph (i) of this Example 1 except that the merger of P into D occurred before the existence of a Plan. Even though D transferred P property (Asset 1) to C, Asset 1 was not Relevant Property of P because P did not hold Asset 1 during the Plan Period. See paragraphs (b)(2)(iv) and (a)(4)(iii) of this section. Because Asset 1 is not Relevant Property, D did not receive C stock distributed in the distribution in exchange for Relevant Property when it contributed Asset 1 to C, none of the distributed stock reflects the basis of Separated Property, and C does not hold Relevant Property immediately before the distribution. Further, Relevant Property of P has not been divided. Therefore, P is not a Predecessor of D.

Example 2.

Planned acquisition of Distributing, but not Predecessor of Distributing - (i) Facts. X owns 100% of the stock of P, which holds multiple assets. Y owns 100% of the stock of D. The following steps occur as part of a Plan: P merges into D in a reorganization under section 368(a)(1)(A). Immediately after the merger, X and Y own 90% and 10%, respectively, of the stock of D. D then contributes to C one of the assets (Asset 1) acquired from P in the merger. In exchange for Asset 1, D receives additional C stock. D distributes the stock of C to X and Y, pro rata. The contribution and distribution constitute a reorganization under section 368(a)(1)(D). Immediately before the distribution, Asset 1 has a basis of $50x and a fair market value of $110x, and the stock of C held by D has a basis of $120x and a fair market value of $200x.

(ii) Analysis - (A) Predecessor. Under paragraph (b)(1) of this section, P is a Predecessor of D. Immediately before the distribution and as part of a Plan, C holds P Relevant Property (Asset 1) the gain on which was not recognized in full as part of a Plan. Further, some of the C stock distributed in the distribution was acquired by D in exchange for Asset 1, and it reflects the basis of Separated Property (Asset 1). In addition, immediately after the distribution, D continues to hold Relevant Property of P. Therefore, P's Relevant Property has been divided between C and D.

(B) Acquisition of predecessor stock. Under paragraph (d)(1) of this section, Y is treated as acquiring stock representing 10% of the voting power and value of P as a result of the merger of P into D. The 10% acquisition of P stock does not cause section 355(e) gain recognition or cause application of paragraph (e)(2) of this section because there has not been a Planned 50-percent Acquisition of P. X acquires 90% of the voting power and value of D as a result of the merger of P into D. The acquisition of greater than 50% of the D stock implicates section 355(e) and results in gain recognition, subject to the rules of paragraph (e) of this section.

(C) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $80x of gain ($200x of fair market value minus $120x of basis of the C stock held by D), the Statutory Recognition Amount described in section 361(c)(2). However, under paragraph (e)(3) of this section, D's gain recognized by reason of X's acquisition of D stock will not exceed $20x, the excess of the Statutory Recognition Amount ($80x) over the amount of gain that D would have been required to recognize under paragraph (e)(2) of this section if there had been a Planned 50-percent Acquisition of the Predecessor of D but not D in the section 381 transaction ($60x). The hypothetical gain under paragraph (e)(2) of this section equals the amount D would have recognized had it transferred Asset 1 (Separated Property) to a newly-formed corporation (C1) solely for stock and distributed the C1 stock in a Hypothetical D/355(e) Reorganization. Under section 361(c)(2), D would recognize $60x of gain, an amount equal to the gain in the hypothetical C1 stock (excess of the $110x fair market value over the $50x basis). Therefore, D recognizes $20x of gain ($80x−$60x).

Example 3.

Predecessor of Distributing owns Controlled stock; gain duplication - (i) Facts. X owns 100% of the stock of P, which holds multiple assets, including Asset 2. Y owns 100% of the stock of D. P owns 35% of the stock of C (Block 1), and D owns the remaining 65% of the C stock (Block 2). The following steps occur as part of a Plan: P merges into D in a reorganization under section 368(a)(1)(A), and D immediately thereafter distributes all of the C stock to X and Y pro rata. Immediately after the merger, X and Y own 10% and 90%, respectively, of the D stock, and, prior to the distribution, D owns Block 1 with a basis of $40x and a fair market value of $45x, and Block 2 with a basis of $10x and a fair market value of $65x. D continues to hold Asset 2.

(ii) Analysis - (A) Predecessor. Under paragraph (b)(1) of this section, P is a Predecessor of D. Some of the Controlled stock distributed in the distribution was Relevant Property of P, the gain on which was not recognized in full as part of a Plan. See paragraph (b)(1)(ii)(A)(2) of this section. This Controlled stock is Separated Property. See paragraph (b)(2)(vii) of this section. Because the gain on the P Controlled stock was not recognized in full, this stock reflects the basis of Separated Property. See paragraph (b)(1)(ii)(B) of this section. Because some of the Controlled stock distributed in the distribution was Relevant Property of P, C is deemed to have received Relevant Property of P. See paragraph (b)(1)(iii) of this section. Further, D continues to hold Relevant Property of P immediately after the distribution. Therefore, P's Relevant Property has been divided between C and D.

(B) Acquisition of predecessor stock. Under paragraph (d)(1) of this section, Y is treated as acquiring stock representing 90% of the voting power and value of P, as a result of the merger of P into D. Accordingly, there has been a Planned 50-percent Acquisition of P.

(C) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $60x of gain ($110x of fair market value minus $50x of basis of the C stock held by D), the Statutory Recognition Amount under section 355(c)(2). However, under paragraph (e)(2) of this section, D's gain recognized by reason of the deemed acquisition of P stock will not exceed $5x, an amount equal to the amount D would have recognized had it transferred Block 1 of the C stock (Separated Property) to a newly-formed corporation (C1) solely for stock and distributed the C1 stock to D shareholders in a Hypothetical D/355(e) Reorganization. For purposes of this computation, the basis and fair market value of the Block 1 C stock equal their basis and fair market value in the hands of D immediately before the distribution of C stock. Under section 361(c)(2), D would recognize $5x of gain, an amount equal to the gain in the hypothetical C1 stock ($45x−$40x). Therefore, D recognizes $5x of gain.

Example 4.

Controlled stock as Substitute Asset - (i) Facts. X owns 100% of the stock of P, which owns multiple assets, including 100% of the stock of R and Asset 2. Y owns 100% of the stock of D. The following steps occur as part of a Plan: P merges into D in a reorganization under section 368(a)(1)(A) (the P-D reorganization). Immediately after the merger, X and Y own 10% and 90%, respectively, of the stock of D. D then causes R to transfer all of its assets to C in a reorganization under section 368(a)(1) (the R-C reorganization). At the time of the P-D reorganization, the R stock has a basis of $40x and a fair market value of $110x. D distributes the stock of C to X and Y, pro rata. D continues to directly hold Asset 2. Immediately before the distribution, the C stock held by D that was deemed received in the R-C reorganization has a basis of $40x and a fair market value of $110x, and all of the stock of C held by D has a basis of $100x and a fair market value of $200x.

(ii) Analysis - (A) Predecessor. Under paragraph (b)(1) of this section, P is a Predecessor of D. D is treated as acquiring a block of C stock in exchange for a direct or indirect interest in R stock (Relevant Stock) in the R-C reorganization because the basis of D in that C stock reflects the basis of the R stock. See paragraph (b)(2)(x) of this section. Further, because the block of C stock is treated as received in exchange for R stock, that block of C stock is a Substitute Asset, which is treated as Relevant Property. See paragraph (b)(2)(vi) of this section. Therefore, some of the C stock distributed in the distribution was Relevant Property of P, gain on which was not recognized in full as part of a Plan. This C stock is Separated Property. See paragraph (b)(2)(vii) of this section. Because the gain on P's R Stock (for which C stock is substituted) was not recognized in full, this C stock reflects the basis of Separated Property. See paragraph (b)(1)(ii)(B) of this section. Finally, under paragraph (b)(1)(iii) of this section, C is deemed to have received Relevant Property of P, and, immediately after the distribution, D continues to hold Asset 2, which is Relevant Property of P. Therefore, P's Relevant Property has been divided between C and D.

(B) Acquisition of predecessor stock. Under paragraph (d)(1) of this section, Y is treated as acquiring stock representing 90% of the voting power and value of P, as a result of the P-D reorganization. Accordingly, there has been a Planned 50-percent Acquisition of P.

(C) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $100x of gain ($200x of fair market value minus $100x of basis of all C stock held by D), the Statutory Recognition Amount described in section 355(c)(2). However, under paragraph (e)(2) of this section, D's gain recognized by reason of the deemed acquisition of P stock will not exceed $70x, an amount equal to the amount D would have recognized had it transferred the C stock deemed received in the R-C reorganization under section (b)(2)(x) of this section (Separated Property) to a newly-formed corporation (C1) solely for stock and distributed the C1 stock to D shareholders in a Hypothetical D/355(e) Reorganization. Under section 361(c)(2), D would recognize $70x of gain, an amount equal to the gain in the hypothetical C1 stock (excess of the $110x fair market value over the $40x basis). Therefore, D recognizes $70x of gain.

Example 5.

Predecessor of Distributing; section 351 transaction - (i) Facts. X owns 100% of the stock of P, which holds multiple assets, including Asset 1, Asset 2, and Asset 3. Y owns 100% of the stock of D. The following steps occur as part of a Plan: P transfers Asset 1 and Asset 2 to D and Y transfers property to D in an exchange qualifying under section 351. Immediately after the exchange, P and Y own 10% and 90%, respectively, of the stock of D. D then contributes Asset 1 to C in exchange for additional C stock. D distributes all of the stock of C to P and Y, pro rata. D continues to directly hold Asset 2, and P continues to directly hold Asset 3. The contribution and distribution constitute a reorganization under section 368(a)(1)(D). Immediately before the distribution, Asset 1 has a basis of $40x and a fair market value of $110x, and the stock of C held by D has a basis of $100x and a fair market value of $200x. Following the distribution, and as part of the same Plan, Z acquires 51% of the P stock.

(ii) Analysis - (A) Predecessor. Under paragraph (b)(1) of this section, P is a Predecessor of D. Immediately before the distribution, and as part of a Plan, C holds P Relevant Property (Asset 1), the gain on which was not recognized in full as part of a Plan. Further, the C stock distributed in the distribution was acquired by D in exchange for an interest in P Relevant Property transferred to C, and the basis of the C stock reflects the basis of Separated Property (Asset 1). In addition, immediately after the distribution, each of P and D holds Relevant Property of P. Therefore, P's Relevant Property has been divided between C, on the one hand, and P and D on the other hand.

(B) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $100x of gain ($200x of fair market value minus $100x of basis of the C stock held by D), the Statutory Recognition Amount described in section 361(c)(2). However, under paragraph (e)(2) of this section, D's gain recognized by reason of Z's acquisition of P stock will not exceed $70x, an amount equal to the amount D would have recognized had it transferred Asset 1 (Separated Property) to a newly-formed corporation (C1) solely for voting stock and distributed the C1 stock to D shareholders in a Hypothetical D/355(e) Reorganization. Under section 361(c)(2), D would recognize $70x of gain, an amount equal to the gain in the hypothetical C1 stock (excess of the $110x fair market value over the $40x basis). Therefore, D recognizes $70x of gain.

Example 6.

Predecessor of Distributing; forward triangular merger - (i) Facts. X owns 100% of the stock of P, which owns multiple assets, including 100% of the stock of R and Asset 2. Y owns 100% of the stock of D. The following steps occur as part of a Plan: R merges into C in a reorganization under section 368(a)(1)(A) and (2)(D). Immediately after the merger P and Y own 10% and 90%, respectively, of the stock of D. D distributes the stock of C to P and Y pro rata. Immediately before the distribution, R's directly-held assets have a basis of $40x and a fair market value of $110x. Immediately before the distribution, D has a basis in the C stock of $60x and a fair market value of $200x. Pursuant to the same Plan, Z acquires 51% of P stock. P continues to hold Asset 2.

(ii) Analysis - (A) Predecessor. Under paragraph (b)(1) of this section, P is a Predecessor of D because immediately before the distribution, and as part of a Plan, C holds directly P Relevant Property (Underlying Property of R) the gain on which was not recognized in full as part of a Plan. Further, the C stock distributed in the distribution was acquired by D, in part, in deemed exchange for P Relevant Property (see paragraph (b)(2)(x) of this section), and the C stock reflects the basis of Separated Property (Underlying Property of R). See § 1.358-6(c)(1). In addition, immediately after the distribution, P's Relevant Property has been divided between C, on the one hand, and P and D on the other hand.

(B) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $140x of gain ($200x of fair market value minus $60x of basis of the C stock held by D), the Statutory Recognition Amount under section 355(c)(2). However, under paragraph (e)(2) of this section, D's gain recognized by reason of the 51% acquisition of P stock by Z will not exceed $70x, an amount equal to the amount D would have recognized had it transferred the Underlying Property of R to a newly-formed corporation (C1) solely in exchange for stock and distributed the C1 stock to D shareholders in a Hypothetical D/355(e) Reorganization. Under section 361(c)(2), D would recognize $70x of gain, an amount equal to the gain in hypothetical C1 stock (excess of the $110x aggregate fair market value of the Underlying Property of R over the $40x basis). Therefore, D recognizes $70x of gain.

Example 7.

Potential Predecessor in sequential distributions - (i) Facts. X owns 100% of P, which owns multiple assets, including Asset 1 and Asset 2. Y owns 100% of the stock of D, D owns 100% of the stock of D1, and D1 owns 100% of the stock of C. The following steps occur as part of a Plan: P merges into D1 in a reorganization under section 368(a)(1)(A). Immediately after the merger, X and D own 10% and 90%, respectively, of the stock of D1. D1 contributes Asset 1 to C in exchange for additional C stock, but D1 continues to hold Asset 2. D1 distributes the stock of C to D and X, pro rata in a distribution to which section 355 applies (First Distribution), and D distributes to Y all of the stock of C that it received from D1 in a distribution to which section 355 applies (Second Distribution). The contribution of Asset 1 by D1 to C and the First Distribution constitute a reorganization under section 368(a)(1)(D). Immediately before the First Distribution and the Second Distribution, Asset 1 has a basis of $10x and a fair market value of $60x, and the stock of C has a fair market value of $200x. Immediately before the First Distribution, the stock of C held by D1 has a basis of $100x. The stock of C held by D immediately before the Second Distribution has a basis of $80x.

(ii) Analysis - (A) Predecessor in First Distribution. Under paragraph (b)(1) of this section, P is a Predecessor of D1. Immediately before the First Distribution, and as part of a Plan, C holds P Relevant Property (Asset 1), the gain on which was not recognized in full as part of a Plan. Further, the C stock distributed in the First Distribution was directly acquired by D1 in exchange for P Relevant Property, and it reflects the basis of Separated Property (Asset 1). In addition, immediately after the First Distribution, each of C and D1 continues to hold Relevant Property of P. Therefore, P's Relevant Property has been divided between C and D1.

(B) Predecessor in Second Distribution. Under paragraph (b)(1) of this section, P is not a Predecessor of D. Immediately before the Second Distribution, the stock of C distributed does not reflect the basis of Separated Property (Asset 1). Because there has been no Planned 50-percent Acquisition of D, C, or a Predecessor of D, there is no application of section 355(e) to the Second Distribution.

(C) Gain on First Distribution. By application of section 355(f), section 355 and the regulations thereunder (including the gain limitation rules in paragraph (e) of this section) would not apply to the First Distribution. Therefore, D1 would be required to recognize $100x of gain (excess of the $200x fair market value over the $100x basis of C stock held by D1) under section 311(b), and D would be treated as receiving a distribution of $180x to which section 301 applied. However, under paragraph (g)(1) of this section, section 355(f) will not apply to the First Distribution. As a result, section 355, including the gain limitation rules of paragraph (e)(2) of this section, will apply to the First Distribution. Under paragraph (e)(2) of this section, D1's gain recognized by reason of the deemed acquisition of P stock by D will not exceed $50x, an amount equal to the amount D1 would have recognized had it transferred Asset 1 (Separated Property) to a newly-formed corporation (C1) solely for stock and distributed the C1 stock to D1 shareholders in a Hypothetical D/355(e) Reorganization. Under section 361(c)(2), D1 would recognize $50x of gain, an amount equal to the gain in the hypothetical C1 stock (excess of the $60x fair market value over the $10x basis). Therefore, D1 recognizes $50x of gain. Under paragraph (g)(2) of this section, however, D1 may choose to apply section 355(f) to the First Distribution, in which case D1 would recognize $100x of gain under section 311(b) and section 301 would apply to the distribution of C stock to D.

Example 8.

Sequential Predecessors - (i) Facts. X owns 100% of P1, which holds multiple assets, including Asset 1 and Asset 2. Y owns 100% of P2, which holds Asset 3, and Z owns 100% of D. The following steps occur as part of a Plan: P1 merges into P2 in a reorganization under 368(a)(1)(A). Immediately after the merger, X and Y own 10% and 90%, respectively, of the stock of P2. P2 then transfers Asset 1 to D and Z transfers property to D in an exchange qualifying under section 351. As a result of the exchange, P2 and Z own 10% and 90%, respectively, of the stock of D. D then contributes Asset 1 to C in exchange for additional C stock, and P2 retains Asset 2 and Asset 3. D distributes all of the stock of C to P2 and Z, pro rata. The contribution and distribution constitute a reorganization under 368(a)(1)(D), and D recognizes no gain under section 361. Immediately before the distribution, Asset 1 has a basis of $40x and a fair market value of $100x, and the stock of C held by D has a basis of $100x and a fair market value of $200x.

(ii) Analysis - (A) P2 as Predecessor of D. Under paragraph (b)(1) of this section, P2 is a Predecessor of D. Immediately before the distribution, and as part of a Plan, C holds P2 Relevant Property (Asset 1), the gain on which was not recognized in full as part of a Plan. Further, the C stock distributed in the distribution was acquired by D in exchange for a direct interest in P2 Relevant Property (Asset 1), and it reflects the basis in Separated Property (Asset 1). In addition, immediately after the distribution, P2 continues to hold P2 Relevant Property. Therefore, P2's Relevant Property has been divided between C and P2.

(B) P1 as Predecessor of D. Under paragraph (b)(1) of this section, P1 is a Predecessor of D. P1 transferred property to P2 (a Predecessor of D) as part of a Plan. Immediately before the distribution, and as part of a Plan, C holds P1 Relevant Property (Asset 1) the gain on which was not recognized in full as part of a Plan. Further, the C stock distributed in the distribution was acquired by D in exchange for a direct interest in P1 Relevant Property, and it reflects the basis in Separated Property (Asset 1). In addition, immediately after the distribution, P2 (a successor of P1 under paragraph (b)(2)(iii) of this section) continues to hold Relevant Property of P1. Therefore, P1's Relevant Property has been divided between C and P2 (the successor of P1).

(C) Acquisition of predecessor stock. Under paragraph (d)(1) of this section, Y is treated as acquiring stock representing 90% of the voting power and value of P1 as a result of the merger of P1 into P2. Accordingly, there has been a Planned 50-percent Acquisition of P1. There is no acquisition of P2 stock.

(D) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $100x of gain ($200x of aggregate fair market value minus $100x of aggregate basis of the C stock held by D), the Statutory Recognition Amount described in section 361(c)(2), because there has been a Planned 50-percent Acquisition of P1, a Predecessor of D. However, under paragraph (e)(2) of this section, D's gain recognized by reason of the deemed acquisition of P1 stock will not exceed $60x, an amount equal to the amount D would have recognized had it transferred Asset 1 (Separated Property) to a newly-formed corporation (C1) solely for stock and distributed the C1 stock to D shareholders in a Hypothetical D/355(e) Reorganization. Under section 361(c)(2), D would recognize $60x, an amount equal to the gain in hypothetical C1 stock (excess of the $100x fair market over the $40x basis). The fact that there is no Planned 50-percent Acquisition of either P2 or D does not change this result. Therefore, D recognizes $60x of gain.

Example 9.

Multiple Predecessors of Distributing - (i) Facts. X owns 100% of the stock of P1, which holds multiple assets, including Asset 1 and Asset 3. Y owns 100% of the stock of P2, which holds multiple assets, including Asset 2 and Asset 4. Z owns 100% of the stock of D. The following steps occur as part of a Plan: Each of P1 and P2 merges into D in a reorganization under section 368(a)(1)(A). Immediately after the mergers, each of X and Y owns 10%, and Z owns 80%, of the stock of D. D then contributes to C Asset 1 (acquired from P1), and Asset 2 (acquired from P2). In exchange for Asset 1 and Asset 2, D receives additional C stock. D distributes the stock of C to X, Y, and Z, pro rata. D's contribution of Asset 1 and Asset 2 and the distribution constitute a reorganization under section 368(a)(1)(D). D continues to hold Asset 3 and Asset 4. Immediately before the distribution, Asset 1 has a basis of $50x and a fair market value of $110x, Asset 2 has a basis of $70x and a fair market value of $90x, and the stock of C held by D has a basis of $130x and a fair market value of $220x.

(ii) Analysis - (A) Predecessor. Under paragraph (b)(1) of this section, each of P1 and P2 is a Predecessor of D. Immediately before the distribution and as part of a Plan, C holds P1 Relevant Property (Asset 1) and P2 Relevant Property (Asset 2), each of which was transferred as part of a Plan without full gain recognition. The C stock distributed in the distribution was acquired by D in exchange for Asset 1 and Asset 2, and that stock reflects the basis in both Asset 1 and Asset 2 (Relevant Property). In addition, immediately after the distribution, D continues to hold Relevant Property of P1 and P2. Therefore, each of P1's and P2's Relevant Property has been divided between C and D.

(B) Acquisition of Predecessor stock. Under paragraph (d)(1) of this section, Z is treated as acquiring stock representing 80% of the voting power and value of each of P1 and P2 as a result of the mergers of P1 and P2 into D. Accordingly, there has been a Planned 50-percent Acquisition of P1 and P2.

(C) Gain limited. Without regard to the limitations in paragraph (e) of this section, D would be required to recognize $90x of gain ($220x of fair market value minus $130x of basis of the C stock held by D), the Statutory Recognition Amount under section 361(c)(2). However, under paragraph (e)(2) of this section, D's gain recognized by reason of the deemed acquisition of P1 stock will not exceed $60x ($110x fair market value minus $50x basis), an amount equal to the amount D would have recognized had it transferred Asset 1 (Separated Property) to a newly-formed corporation (C1) solely for stock and distributed that (C1) stock to D shareholders in a Hypothetical D/355(e) Reorganization. D's gain recognized by reason of the deemed acquisition of P2 stock will not exceed $20x ($90x fair market value minus $70x basis), an amount equal to the amount D would have recognized had it transferred Asset 2 (Separated Property) to a second newly-formed corporation (C2) solely for stock and distributed the (C2) stock to D shareholders in a Hypothetical D/355(e) Reorganization. Therefore, D will recognize $80x of gain ($60x + $20x).

Example 10.

Successor of Controlled - (i) Facts. X owns 100% of the stock of each of D and R. The following steps occur as part of a Plan: D distributes all of its C stock to X. Immediately before the Distribution, D's C stock has a basis of $10x and a fair market value of $30x. C then merges into R in a reorganization under section 368(a)(1)(D). Immediately after the merger, X owns all of the R stock. As part of the same Plan, Z purchases 51% of the stock of R from X.

(ii) Analysis - (A) Successor. Under paragraph (c)(2) of this section, R is a Successor of C because after the distribution C transfers property to R in a section 381 transaction. Accordingly, under paragraph (d)(2) of this section, Z's acquisition of stock of R is treated as an acquisition of stock of C. Therefore, Z is treated as acquiring 51% of the stock of C.

(B) Gain not limited. The special gain limitation rules in paragraph (e)(2) or (3) of this section do not apply because there is not an acquisition of stock of D or a Predecessor of D. Therefore, because the distribution and Z's acquisition of a 51% interest in R are part of a Plan, D is required to recognize gain in the amount of $20x ($30x fair market value minus $10x basis of the C stock held by D), the Statutory Recognition Amount under section 355(c)(2).

Example 11.

Multiple Successors - (i) Facts. X owns 100% of the stock of both D and R. Y owns 100% of the stock of S. The following steps occur as part of a Plan: D distributes all of the C stock to X. Immediately after the distribution, D merges into R in a reorganization under section 368(a)(1)(A). Following the merger, R merges into S in a reorganization under section 368(a)(1)(A). As a result of the merger of R into S, X and Y own 10% and 90%, respectively, of the S stock. Immediately before the distribution, D's C stock has a basis of $10x and a fair market value of $30x.

(ii) Analysis - (A) Successor. Under paragraph (c)(2)(i) of this section, R is a successor of D because, after the distribution, D transfers property to R in a section 381 transaction. Under paragraph (c)(2)(ii), S is also a successor of D because R (a successor of D) transfers property to S in a section 381 transaction.

(B) Acquisition of Successor Stock. Under paragraph (d)(1) of this section, there is no deemed acquisition of D stock as a result of the merger of D into R because X wholly owns the stock of D before the merger and wholly owns the stock of R after the merger. Under paragraph (d)(1) of this section, Y is treated as acquiring stock representing 90% of the voting power and value of R (Successor of D) as a result of the merger of R into S. Under paragraph (d)(2) of this section, an acquisition of the R stock is also treated as an acquisition of the D stock.

(C) Gain. The special gain limitation rules in paragraph (e)(2) or (3) of this section do not apply because there is not an acquisition of stock of D or a Predecessor of D. Therefore, because there is a Planned 50-percent Acquisition of R (Successor of D), D is required to recognize $20x of gain ($30x fair market value minus $10x basis of the C stock held by D), the Statutory Recognition Amount described in section 355(c)(2).

(i) Effective/applicability date -

(1) In general. Except as provided in paragraph (i)(2) or (3) of this section, this section applies to distributions occurring after January 18, 2017.

(2) Transition rule -

(i) In general. Except as provided in paragraph (i)(3) of this section, this section does not apply to a distribution (as defined in paragraph (i)(2)(ii) of this section) that is -

(A) Made pursuant to a binding agreement in effect on or before December 16, 2016 and at all times thereafter;

(B) Described in a ruling request submitted to the Internal Revenue Service on or before December 16, 2016; or

(C) Described on or before December 16, 2016 in a public announcement or in a filing with the Securities and Exchange Commission.

(ii) Definition of distribution. For purposes of paragraphs (i)(2)(i) and (3) of this section, references to a distribution include a reference to a distribution and other related pre-distribution transactions that together effect a division of the assets of a Predecessor of Distributing. Therefore, for example, if a corporation would qualify as a Predecessor of Distributing under paragraph (b)(1) of this section, Distributing may claim the benefit of the transition rule of paragraph (i)(2) of this section only if all steps relevant to the determination of Predecessor of Distributing status are described in the binding agreement, ruling request, announcement, or filing described in paragraph (i)(2)(i) of this section.

(3) Exception. Notwithstanding paragraph (i)(1) or (2) of this section, Distributing and any affiliated group that it is a member of as of the beginning of the date on which a distribution (as defined in paragraph (i)(2)(ii) of this section) may apply this section in its entirety to that distribution if it occurs after November 22, 2004. However, under this paragraph (i)(3), taxpayers must consistently apply this section in its entirety to all distributions occurring after November 22, 2004, that are part of the same Plan.

(j) Expiration date. The applicability of this section expires on or before December 16, 2019.

[T.D. 9805, 81 FR 91747, Dec. 19, 2016]