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that such corporation, or such corporation with respect to any of its shareholders, does not meet the requirements of paragraph (i), (2), (3), or (4) of this subsection shall not be taken into account, and such determination, in the case of a corporation which does not meet such requirements, shall be made as if this subsection had not

been enacted. SEC. 342. LIQUIDATION OF CERTAIN FOREIGN PERSONAL HOLDING

COMPANIES. (a) IN GENERAL.-If any distribution

(1) is, within the meaning of the Internal Revenue Code of 1939, a distribution in partial liquidation or in complete liquidation (including any one of a series of distributions made by the corporation in complete cancellation or redemption of all its stock) and

(2) is made by a foreign corporation which, with respect to any taxable year beginning on or before, and ending after, August 26, 1937, was a foreign personal holding company, and with respect to which a United States group (as defined in section 552 (a) (2))

existed after August 26, 1937, and before January 1, 1938, then the distribution shall be treated as a distribution in full or part payment in exchange for the stock, and the amount of the gnin recognized (determined under section 1002 without regard to this part) resulting from such distribution shall be considered as a gain from the sale or exchange of a capital asset held for not more than 6 months.

(b) SPECIAL RULE FOR CERTAIN LIQUIDATIONS BEFORE 1956.Subsection (a) shall not apply in the case of a series of distributions in complete liquidation described in subsection (a) if

(1) the first distribution is made on or after June 22, 1954, and

(2) the final distribution is made before January 1, 1956; and the amount of the gain recognized (determined under section 1002 without regard to this part) resulting from such distributions shall be considered as a gain from the sale or exchange of a capital asset, or of property which is not a capital asset, as the case may be.

Subpart D-Definition Sec. 346. Partial liquidation defined. SEC. 346. PARTIAL LIQUIDATION DEFINED.

(a) IN GENERAL.- For purposes of this subchapter, a distribution shall be treated as in partial liquidation of a corporation if

(1) the distribution is one of a series of distributions in redemption of all of the stock of the corporation pursuant to a plan; or

(2) the distribution is not essentially equivalent to a dividend, is in redemption of a part of the stock of the corporation pursuant to & plan, and occurs within the taxable year in which the plan is adopted or within the succeeding taxable year, including (but not limited to) a distribution which meets the requirements of sub

section (b). For purposes of section 562 (b) (relating to the dividends paid deduction) and section 6043 (relating to information returns), a partial liquidation includes a redemption of stock to which section 302 applies.

(b) TERMINATION OF A BUSINESS.-A distribution shall be treated as a distribution described in subsection (a) (2) if the requirements of paragraphs (1) and (2) of this subsection are met.

(1) The distribution is attributable to the corporation's ceasing to conduct, or consists of the assets of, a trade or business which has been actively conducted throughout the 5-year period immediately before the distribution, which trade or business was not acquired by the corporation within such period in a transaction in which gain or loss was recognized in whole or in part.

(2) Immediately after the distribution the liquidating corporation is actively engaged in the conduct of a trade or business, which trade or business was actively conducted throughout the 5-year period ending on the date of the distribution and was not acquired by the corporation within such period in a transaction in which gain

or loss was recognized in whole or in part. Whether or not a distribution meets the requirements of paragraphs (1) and (2) of this subsection shall be determined without regard to whether or not the distribution is pro rata with respect to all of the shareholders of the corporation.

(c) TREATMENT OF CERTAIN REDEMPTIONS.- The fact that, with respect to a shareholder, a distribution qualifies under section 302 (a) (relating to redemptions treated as distributions in part or full payment in exchange for stock) by reason of section 302 (b) shall not be taken into account in determining whether the distribution, with respect to such shareholder, is also a distribution in partial liquidation of the corporation.

PART III— CORPORATE ORGANIZATIONS AND

REORGANIZATIONS

Subpart A. Corporate organizations.
Subpart B. Effects on shareholders and security holders.
Subpart C. Effects on corporation.
Subpart D. Special rule; definitions.

Subpart A-Corporate Organizations

Sec. 351. Transfer to corporation controlled by transferor. SEC. 351. TRANSFER TO CORPORATION CONTROLLED BY TRANS

FEROR. (a) GENERAL RULE.—No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368 (c)) of the corporation. For purposes of this section, stock or securities issued for services shall not be considered as issued in return for property.

(b) RECEIPT OF PROPERTY.-If subsection (a) would apply to an exchange but for the fact that there is received, in addition to the stock or securities permitted to be received under subsection (a), other property or money, then

(1) gain (if any) to such recipient shall be recognized, but not in excess of

(A) the amount of money received, plus

(B) the fair market value of such other property received; and (2) no loss to such recipient shall be recognized. (c) ŚPECIAL RULE.-In determining control, for purposes of this section, the fact that any corporate transferor distributes part or all of the stock which it receives in the exchange to its shareholders shall not be taken into account. (d) Cross REFERENCES.

(1) For special rule where another party to the exchange assumes a liability, or acquires property subject to a liability, see section 357.

(2) For the basis of stock, securities, or property received in an exchange to which this section applies, see sections 358 and 362.

(3) For special rule in the case of an exchange described in this section but which results in a gift, see section 2501 and following.

(4) For special rule in the case of an exchange described in this section but which has the effect of the payment of compensation by the corporation or by a transferor, see section 61 (a) (1).

Subpart B-Effects on Shareholders and Security Holders
Sec. 354. Exchanges of stock and securities in certain reorganiza-

tions.
Sec. 355. Distribution of stock and securities of a controlled cor-

poration.
Sec. 356. Receipt of additional consideration.
Sec. 357. Assumption of liability.

Sec. 358. Basis to distributces.
SEC. 354. EXCHANGES OF STOCK AND SECURITIES IN CERTAIN RE-

ORGANIZATIONS. (a) GENERAL RULE.

(1) IN GENERAL.-No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation à party to the reorganization. (2) LIMITATION.-Paragraph (1) shall not apply if

(A) the principal amount of any such securities received exceeds the principal amount of any such securities surrendered, or

(B) any such securities are received and no such securities are surrendered. (3) CROSS REFERENCE.

For treatment of the exchange 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) EXCEPTION.

(1) IN GENERAL.-Subsection (a) shall not apply to an exchange in pursuance of a plan of reorganization within the meaninz of section 368 (a) (1) (D), unless

(A) the corporation to which the assets are transferred acquires substantially all of the assets of the transferor of such assets; and

(B) the stock, securities, and other properties received by such transferor, as well as the other properties of such transferor, are distributed in pursuance of the plan of reorganization.

(2) CROSS REFERENCE.

For special rules for certain exchanges in pursuance of plans of reor.

ganization within the meaning of section 368 (a) (1) (D), see section 355. (c) CERTAIN RAILROAD REORGANIZATIONS.—Notwithstanding any other provision of this subchapter, subsection (a) (1) (and so much of section 356 as relates to this section) shall apply with respect to a plan of reorganization (whether or not a reorganization within the meaning of section 368 (a)) for a railroad approved by the Interstate Commerce Commission under section 77 of the Bankruptcy Act, or under section 20b of the Interstate Commerce Act, as being in the public interest. SEC. 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 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 or his delegate 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 tbe 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) LIMITATION.--Paragraph (1) shall not apply if

(A) the principal amount of the securities in the controlled corporation which are received exceeds the principal amount of tbe securities which are surrendered in connection with such distribution, or

(B) securities in the controlled corporation are received and no securities are surrendered in connection with such distribution. 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 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 controlled 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 sur

rendered), 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 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, 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 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 directly (or through one or more corporations) by another corporation within the period described in subparagraph (B), or

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