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TITLE 26-INTERNAL REVENUE CODE (1) the amount of any liability to which the property distributed is subject, (2) the amount of any liability of the corpo- ration assumed by a shareholder in connec- tion with the distribution, and (3) any gain to the corporation recognized under subsection (b), (c), or (d) of section 311, under section 341(f), or under section 617(d)(1), 1245(a), 1250(a), 1251(c), 1252(a), or 1254(a). (d) Certain distributions of stock and securities (1) In general The distribution to a distributee by or on behalf of a corporation of its stock or securi- ties, of stock or securities in another corpora- tion, or of property, in a distribution to which this title applies, shall not be considered a dis- tribution of the earnings and profits of any corporation- (A) if no gain to such distributee from the receipt of such stock or securities, or prop- erty, was recognized under this title, or (B) if the distribution was not subject to tax in the hands of such distributee by reason of section 305(a). (2) Prior distributions In the case of a distribution of stock or se- curities, or property, to which section 115(h) of the Internal Revenue Code of 1939 (or the corresponding provision of prior law) applied, the effect on earnings and profits of such dis- tribution shall be determined under such sec- tion 115(h), or the corresponding provision of prior law, as the case may be. (3) Stock or securities For purposes of this subsection, the term "stock or securities" includes rights to acquire stock or securities. (e) Special rule for partial liquidations and certain redemptions In the case of amounts distributed in partial liquidation (whether before, on, or after June 22, 1954) or in a redemption to which section 302(a) or 303 applies, the part of such distribu- tion which is properly chargeable to capital ac- count shall not be treated as a distribution of earnings and profits. (f) Effect on earnings and profits of gain or loss and of receipt of tax-free distributions (1) Effect on earnings and profits of gain or loss The gain or loss realized from the sale or other disposition (after February 28, 1913) of property by a corporation- (A) for the purpose of the computation of the earnings and profits of the corporation, shall (except as provided in subparagraph (B)) be determined by using as the adjusted basis the adjusted basis (under the law ap- plicable to the year in which the sale or other disposition was made) for determining gain, except that no regard shall be had to the value of the property as of March 1, 1913; but (B) for purposes of the computation of the earnings and profits of the corporation for any period beginning after February 28, 1913, shall be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for deter- mining gain. Gain or loss so realized shall increase or de- crease the earnings and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing tax- able income under the law applicable to the year in which such sale or disposition was made. Where, in determining the adjusted basis used in computing such realized gain or loss, the adjustment to the basis differs from the adjustment proper for the purpose of de- termining earnings and profits, then the latter adjustment shall be used in determin- ing the increase or decrease above provided. For purposes of this subsection, a loss with respect to which a deduction is disallowed under section 1091 (relating to wash sales of stock or securities), or the corresponding pro- vision of prior law, shall not be deemed to be recognized. (2) Effect on earnings and profits of receipt of tax- free distributions Where a corporation receives (after Febru- ary 28, 1913) a distribution from a second cor- poration which (under the law applicable to the year in which the distribution was made) was not a taxable dividend to the sharehold- ers of the second corporation, the amount of such distribution shall not increase the earn- ings and profits of the first corporation in the following cases: (A) no such increase shall be made in re- spect of the part of such distribution which (under such law) is directly applied in re- duction of the basis of the stock in respect of which the distribution was made; and (B) no such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated be- tween such stock and the property received (or such basis would, but for section 307(b), be so allocated). (g) Earnings and profits-increase in value accrued before March 1, 1913 (1) If any increase or decrease in the earn- ings and profits for any period beginning after February 28, 1913, with respect to any matter would be different had the adjusted basis of the property involved been deter- mined without regard to its March 1, 1913, value, then, except as provided in paragraph (2), an increase (properly reflecting such dif- ference) shall be made in that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913. (2) If the application of subsection (f) to a sale or other disposition after February 28, 1913, results in a loss which is to be applied in decrease of earnings and profits for any period beginning after February 28, 1913, then, notwithstanding subsection (f) and in lieu of the rule provided in paragraph (1) of this subsection, the amount of such loss so to be applied shall be reduced by the amount, if any, by which the adjusted basis of the prop- erty used in determining the loss exceeds the adjusted basis computed without regard to the value of the property on March 1, 1913, § 312 Page 242