Article 26p. 26

NATIONAL INTERNAL REVENUE CODE TAXATION, TARIFF and CUSTOMS LAWS

money received plus the fair market value of the property

(other than money) received;

(B) Basis for Determining Gain or Loss from Sale or

Disposition of Property. - The basis of property shall be -

(1) The cost thereof in the case of property acquired

on or after March 1, 1913, if such property was

acquired by purchase; or

(2) The fair market price or value as of the date of

acquisition, if the same was acquired by inheritance;

or

(3) If the property was acquired by gift, the basis

shall be the same as if it would be in the hands of

the donor or the last preceding owner by whom it

was not acquired by gift, except that if such basis is

greater than the fair market value of the property at

the

time

of

the

gift

then, for the purpose of

determining loss, the basis shall be such fair market

value; or

(4) If the property was acquired for less than an

adequate consideration in money or money's worth,

the basis of such property is the amount paid by the

transferee for the property; or

(5) The basis as defined in paragraph (C)(5) of this

Section, if the property was acquired in a transaction

where

gain

or

loss

is

not

recognized

under

paragraph (C)(2) of this Section.

(C) Exchange of Property. -

(1) General Rule. - Except as herein provided, upon

the sale or exchange or property, the entire amount

of the gain or loss, as the case may be, shall be

recognized.

(2) Exception. - No gain or loss shall be recognized if

in pursuance of a plan of merger or consolidation -

(a) A corporation, which is a party to a merger

or consolidation, exchanges property solely for

stock in a corporation, which is a party to the

merger or consolidation; or

(b)

A

shareholder

exchanges

stock

in

a

corporation, which is a party to the merger or

consolidation, solely for the stock of another

corporation

also

a party to the merger or

consolidation; or

(c) A security holder of a corporation, which is a

party

to

the

merger

or

consolidation,

exchanges his securities in such corporation,

solely for stock or securities in such corporation,

a party to the merger or consolidation.

No gain or loss shall also be recognized if property is

transferred to a corporation by a person in exchange

for

stock

or

unit

of

participation

in

such

a

corporation of which as a result of such exchange

said person, alone or together with others, not

exceeding four (4) persons, gains control of said

corporation: Provided, That stocks issued for services

shall not be considered as issued in return for

property.

(3) Exchange Not Solely in Kind. -

(a) If, in connection with an exchange described

in

the

above

exceptions,

an

individual,

a

shareholder, a security holder or a corporation

receives not only stock or securities permitted

to be received without the recognition of gain

or loss, but also money and/or property, the

gain, if any, but not the loss, shall be recognized

but in an amount not in excess of the sum of

the money and fair market value of such other

property received: Provided, That as to the

shareholder, if the money and/or other property

received has the effect of a distribution of a

taxable

dividend,

there

shall

be

taxed

as

dividend to the shareholder an amount of the

gain

recognized

not

in

excess

of

his

proportionate

share

of

the

undistributed

earnings and profits of the corporation; the

remainder, if any, of the gain recognized shall

be treated as a capital gain.

(b)

If,

in

connection

with

the

exchange

described

in

the

above

exceptions,

the

transferor corporation receives not only stock

permitted

to

be

received

without

the

recognition of gain or loss but also money

and/or other property, then (i) if the corporation

receiving such money and/or other property

distributes it in pursuance of the plan of merger

or consolidation, no gain to the corporation

shall be recognized from the exchange, but (ii)

if the corporation receiving such other property

and/or

money

does

not

distribute

it

in

pursuance

of

the

plan

of

merger

or

consolidation, the gain, if any, but not the loss

to the corporation shall be recognized but in an

amount not in excess of the sum of such

money and the fair market value of such other

property so received, which is not distributed.

(4) Assumption of Liability. -

(a) If the taxpayer, in connection with the

exchanges

described

in

the

foregoing

exceptions, receives stock or securities which

would be permitted to be received without the

recognition of the gain if it were the sole

consideration, and as part of the consideration,

another

party

to the exchange assumes a

liability of the taxpayer, or acquires from the

taxpayer property, subject to a liability, then

such assumption or acquisition shall not be

treated as money and/or other property, and

shall not prevent the exchange from being

within the exceptions.

(b) If the amount of the liabilities assumed plus

the

amount of the liabilities to which the

property is subject exceed the total of the

adjusted

basis

of

the

property

transferred

pursuant to such exchange, then such excess

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.

(5) Basis -

(a) The basis of the stock or securities received

by the transferor upon the exchange specified

in the above exception shall be the same as the

basis

of

the

property,

stock

or

securities

exchanged,

decreased

by

(1)

the

money

received, and (2) the fair market value of the

other property received, and increased by (a)

the

amount

treated

as

dividend

of

the

shareholder and (b) the amount of any gain

that was recognized on the exchange: Provided,

That the property received as ' boot ' shall have

as basis its fair market value: Provided, further,

That if as part of the consideration to the

transferor, the transferee of property assumes a

liability of the transferor or acquires form the

latter

property

subject

to

a

liability,

such

assumption or acquisition (in the amount of the

liability) shall, for purposes of this paragraph, be

treated as money received by the transferor on

the

exchange:

Provided, finally, That if the

transferor receives several kinds of stock or

securities,

the

Commissioner

is

hereby

authorized to allocate the basis among the

several classes of stocks or securities.

(b) The basis of the property transferred in the

hands of the transferee shall be the same as it

would

be

in

the

hands

of

the

transferor

increased

by

the

amount

of

the

gain

recognized to the transferor on the transfer.

(6) Definitions. -

© Compiled by RGL

26 of 201