"(b) DISTRIBUTIONS NOT EQUIVALENT TO DIVIDENDS.-Subsection (a) (2) (C) shall apply if the distribution is not essentially equivalent to a dividend. "(c) TERMINATION OF A BUSINESS.-Subsection (a) (2) (C) shall apply if

"(1) the distribution is attributable to the corporation's ceasing to conduct an active business,

"(2) the distribution is made within a reasonable time after such cessation.

"(3) the distribution consists of all or part of the assets of such discontinued business or the proceeds from the sale or other disposition of any or all of such assets.

"(4) the sum of the cash and the fair market value of the other property included in the distribution described in paragraph (3) is at least equal to 20 percent of the amount by which

"(A) the fair market value of the assets, exceeds

"(B) the liabilities

of the corporation immediately before the distribution, and

"(5) immediately after the distribution the corporation is engaged in another active business.

In such event if the amount of the distribution exceeds the fair market value of the assets of such discontinued business, reduced by the amount of the liabilities of such discontinued business, this subsection shall not apply to such excess.

"(d) ACTIVE BUSINESS.-For purposes of this subchapter, a corporation shall be treated as engaged in active business as of any time if and only if—

"(1) it is engaged in the active conduct of a trade or business at such time,

"(2) such trade or business has been actively conducted throughout the 5-year period immediately preceding, and

“(3) such trade or business was not acquired within the period described in paragraph (2) in a transaction in which

or

"(A) gain or loss was recognized in whole or in part to the transferor,

"(B) in case the transferor was a corporation,

gain or loss was recognized in whole or in part to (or amounts were includible in the income of) the transferor corporation or a shareholder of the transferor corporation.

"(e) APPLICATION OF SUBSECTIONS.-In determining whether a distribution meets the requirements of subsection (b), the fact that such distribution fails to meet any of the requirements of subsection (c) shall not be taken into account. Whether or not a distribution meets the requirements of subsection (b) or (c) shall be determined without regard to whether

"(1) it qualifies or does not qualify 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), or

"(2) it is pro rata or not pro rata with respect to the shareholders of the corporation."

SEC. 18. TRANSFER TO CORPORATION CONTROLLED BY TRANSFERORAMENDMENT OF SECTION 351.

Section 351 is amended to read as follows:

"SEC. 351. TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR.

"(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 or for section 306 stock shall not be considered as issued in return for property other than for the purposes of determining whether the person or persons transferring property are in control of the corporation.

"(b) RECEIPT OF PROPERTY.-If subsection (a) would apply to an exchange but for the fact that the property received by the transferor consists not only of property permitted by subsection (a) to be received without the recognition of gain or loss, but also of other property, or money, then

"(1) IN CASE OF GAIN.

"(A) IN GENERAL.-Except as provided in subparagraphs (B) and (C), gain (if any) to the transferor shall be recognized, but in an amount not in excess of the sum of

"(i) the amount of money received, and

"(ii) the fair market value of such other property received. "(B) SECTION 355 TRANSACTIONS.-If the transfer is made by a corporation as part of a plan pursuant to which stock or securities of the transferee are distributed by the transferor in a transaction to which section 355 (or so much of section 356 as relates to section 355) applies, then the amount of gain (if any) which would otherwise be recognized to the transferor under subparagraph (A) shall be reduced by the sum of

"(i) the amount of money, and

"(ii) the fair market value of such other property received by the transferor

which is distributed by it pursuant to such plan.

"(C) REORGANIZATIONS.-If the transfer is made by a corporation as part of a plan of reorganization within the meaning of section 368 (a) (1), then the amount of gain (if any) which would otherwise be recognized to the transferor under subparagraph (A) shall be reduced by the amount (if any) determined under section 361 (b) (1) (B). "(2) IN CASE OF Loss.-No loss shall be recognized to the transferor. "(c) SPECIAL 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).”

SEC. 19. EXCHANGES OF STOCK AND SECURITIES IN CERTAIN REORGANIZATIONS-AMENDMENT OF SECTION 354.

Section 354 is amended to read as follows:

"SEC. 354. EXCHANGES OF STOCK AND SECURITIES IN CERTAIN RE

ORGANIZATIONS.

"(a) GENERAL RULE.

"(1) IN GENERAL.-No gain or loss shall be recognized (and no amount shall be includible in income) 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 a 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 any such are received and no such securities are surrendered, or

"(B) in the case of an exchange in pursuance of a plan of reorganization within the meaning of section 368 (a) (1) (D), there is received stock in more than one corporation a party to the reorganization. "(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, and stock in more than one corporation a party to the reorganization received in a plan of reorganization within the meaning of section 368 (a) (1) (D)), see section 356.

"(b) 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. 20. DISTRIBUTION OF STOCK AND SECURITIES OF A CONTROLLED CORPORATION-AMENDMENT OF SECTION 355.

Section 355 is amended to read as follows:

"SEC. 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, and

"(B) either

"(i) the requirements of subsection (b) (relating to active business) are satisfied, the fair market value of the stock or securities so distributed is not less than 20 percent or more than 80 percent of the excess of the fair market value of the assets over the liabilities of the distributing corporation immediately before the distribution, and 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);

or

"(ii) it is established to the satisfaction of the Secretary or his delegate that the distribution is not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax; and

"(C) 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 DISTRIBUTION, 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, and

"(B) whether or not the shareholder surrenders stock in the distributing corporation.

"(3) LIMITATION.

“(A) GREATER PRINCIPAL AMOUNT OF SECURITIES.—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) CERTAIN STOCK TREATED AS OTHER PROPERTY.-For purposes of this section (other than paragraph (1) (C) 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

"(i) gain or loss was recognized in whole or in part to the transferor, or

"(ii) in case the transferor was a corporation gain or loss was recognized in whole or in part to (or amounts were includible in the income of) the transferor corporation or a stockholder of the transferor corporation,

shall not be treated as stock of such controlled corporation, but as other property.

"(4) CROSS REFERENCES.—

"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 distributed, each of such corporations), is engaged immediately after the distribution in active business, within the meaning of section 346 (d), 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 active business within the meaning of section 346 (d).

"(2) ACTIVE BUSINESS OF CONTROLLED CORPORATIONS.-For purposes of this section, despite the provisions of section 346 (d), a controlled corporation shall not be treated as engaged in active business if control of such corporation (or of another corporation which, at the time of acquisition of such control, was conducting such active business) was acquired by another corporation within the 5-year period ending on the date of distribution unless stock acquired by such acquiring corporation within such period in a transaction or transactions in which

"(A) no gain or loss was recognized in whole or in part to the transferor, or

"(B) in case the transferor was a corporation, no gain or loss was recognized in whole or in part to (nor were any amounts includible in the income of) the transferor corporation or a shareholder of the transferor corporation,

when combined with acquisitions by such acquiring corporation before the beginning of such period is sufficient to constitute such control."

SEC. 21. RECEIPT OF ADDITIONAL CONSIDERATION-AMENDMENT OF SECTION 356.

Section 356 is amended to read as follows:

"SEC. 356. RECEIPT OF ADDITIONAL CONSIDERATION.

"(a) EXCHANGES OF STOCK AND SECURITIES.

"(1) GENERAL RULE.—If

"(A) section 354 would apply to an exchange made pursuant to a plant of reorganization (other than a reorganization under section 368 (a) (1) (D)), or if section 355 or 371 (b) would apply to an exchange, but for the fact that

"(B) the property received in the exchange consists not only of property permitted by section 354, 355, or 371 (b) to be received without the recognition of gain or loss but also of other property or money.

then no gain or loss shall be recognized to (and no amount shall be includible in the income of) the recipient except to the extent provided in subsection (b). "(2) EXCHANGES PURSUANT ΤΟ SECTION 368 (a) (1) (D) REORGANIZATIONS.-If

"(A) section 354 would apply to an exchange made pursuant to a plan of reorganization under section 368 (a) (1) (D) but for the fact that

"(B) the property received in the exchange

"(i) consists not only of property permitted by section 354 to be received without the recognition of gain or loss, but also of other property or money, or

"(ii) consists entirely of other property or money,

then no gain or loss shall be recognized to (and no amount shall be includible in the income of) the recipient except to the extent provided in subsection (b).

"(b) EXCEPTION.—

"(1) OTHER PROPERTY OR MONEY RECEIVED IN EXCHANGE FOR STOCK.—

"(A) DISTRIBUTIONS HAVING EFFECT OF DIVIDENDS, REDEMPTIONS OF STOCK, OR PARTIAL LIQUIDATIONS.-So much of such other property or money received in exchange for stock as

"(i) has the effect of a distribution of a dividend shall be treated as a dividend to the recipient as provided in section 301, but in an amount not in excess of the recipient's ratable share of the undistributed earnings and profits of the corporation referred to in section 316 (a) (1) or (2);

"(ii) has the effect of a distribution in redemption of stock under section 302 (b) shall be treated as a distribution to the recipient as provided in section 302 (a); and

"(iii) has the effect of a distribution in partial liquidation under section 346 shall be treated as a distribution to the recipient as provided in section 331 (a) (2) and (b).

If clause (ii) or (iii), or both, are applicable, then in determining gain or loss (as the case may be) to the recipient, the adjusted basis of the stock in exchange for which such other property or money referred to in clauses (ii) and (iii) is considered to be received shall be that part of the adjusted basis of all the stock exchanged in the transaction by the recipient as the fair market value of such other property or money referred to in clauses (ii) and (iii) bears to the total fair market value of all the property and money received on the exchange.

"(B) REMAINDER OF OTHER PROPERTY OR MONEY RECEIVED IN EXCHANGE FOR STOCK. The remainder, if any, of such other property or money received in exchange for stock shall be treated as a distribution to which section 301 (c) (2) and (3) applies.

"(2) OTHER PROPERTY OR MONEY RECEIVED IN EXCHANGE FOR SECURITIES.— "(A) AMOUNTS HAVING EFFECT OF PAYMENT OF INTEREST.-So much of such other property or money received in exchange for securities as has the effect of a payment of interest accrued thereon since the date of acquisition of the securities by the recipient (or by a person from whom the recipient acquired the securities in a transaction in which no gain or loss was recognized) shall, to the extent of its fair market value, be treated as interest income to the recipient as provided in section 61 (a) (4).

"(B) REMAINDER OF OTHER PROPERTY OR MONEY RECEIVED IN EXCHANGE FOR SECURITIES.-The remainder of such other property or money received in exchange for securities shall, to the extent of its fair market value, be applied against and reduce the adjusted basis of the property permitted by section 354, 355, or 371 (b) to be received without the recognition of gain or loss, and if in excess of such basis, such excess shall be treated as gain from the sale or exchange of property.

"(c) ADDITIONAL CONSIDERATION RECEIVED IN CERTAIN DISTRIBUTIONS.—If— "(1) section 355 would apply to a distribution made without the surrender of any stock or securities of the distributing corporation, but for the fact that

"(2) the property received in the distribution consists not only of property permitted by section 355 to be received without the recognition of gain, but also of other property or money.

then an amount equal to the sum of such money and the fair market value of such other property shall be treated as a distribution of property to which section 301 applies.