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TITLE 26-INTERNAL REVENUE CODE REFERENCES IN TEXT Section 77 of the Bankruptcy Act, referred to in subsec. (c), is classified to section 205 of Title 11, Bankruptcy. Section 20b of the Interstate Commerce Act, re- ferred to in subsec. (c), is classified to section 20b of Title 49, Transportation. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-253 applicable to taxable years ending after Mar. 31, 1976, see section 2 of Pub. L. 94-253, set out as an Effective Date of 1976 Amend- ment note under section 374 of this title. CROSS REFERENCES Basis to distributees, see section 358 of this title. Carryovers in corporate acquisitions, see section 381 of this title. Complete liquidations of subsidiaries, liquidations to which section applies, see section 332 of this title. Foreign corporations, see section 367 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 83, 332, 356, 358, 367, 368, 381, 382, 425, 1101 of this title. § 355. Distribution of stock and securities of a con- trolled corporation (a) Effect on distributees (1) General rule If- (A) a corporation (referred to in this sec- tion as the "distributing corporation")- (i) distributes to a shareholder, with re- spect to its stock, or (1i) 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 princi- pally as a device for the distribution of the earnings and profits of the distributing cor- poration 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 ex- changed by all or some of the distributees (other than pursuant to an arrangement ne- gotiated or agreed upon prior to such distri- bution) shall not be construed to mean that the transaction was used principally as such a device), (C) the requirements of subsection (b) (re- lating to active businesses) are satisfied, and (D) as part of the distribution, the distrib- uting corporation distributes- (I) all of the stock and securities in the controlled corporation held by it immedi- ately 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 es- tablished to the satisfaction of the Secre- tary that the retention by the distributing corporation of stock (or stock and securi- ties) in the controlled corporation was not in pursuance of a plan having as one of its principal purposes the avoidance of Fed- eral 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 securi- ties. (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 sur- renders stock in the distributing corpora- tion, 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) Limitation Paragraph (1) shall not apply if- (A) the principal amount of the securities in the controlled corporation which are re- ceived exceeds the principal amount of the securities which are surrendered in connec- tion with such distribution, or (B) securities in the controlled corpora- tion are received and no securities are sur- rendered in connection with such distribu- tion. For purposes of this section (other than para- graph (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 which occurs within 5 years of the distribution of such stock and in which gain or loss was recognized in whole or in part, shall not be treated as stock of such con- trolled corporation, but as other property. (4) Cross reference For treatment of the distribution if any property is received which is not permitted to be received under this subsection (including an excess principal amount of securities received over securities surrendered), see section 356. (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 distribut- ed, 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 con- trolled corporations and each of the con- trolled corporations is engaged immediately after the distribution in the active conduct of a trade or business. (2) Definition For purposes of paragraph (1), a corpora- tion 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, or substantially all of its assets consist of stock and securities of a corporation controlled by it (immediately after the distribution) which is so engaged, (B) such trade or business has been ac- tively conducted throughout the 5-year 71-999 0 - 78 - 19 (Vol. 7) Page 261 § 355