J, an individual, holds 10 shares of Class A stock of Corporation X (acquired for $3 each, basis of $30) and 10 shares of Class B stock of Corporation X (acquired for $9 each, basis of $90). Corporation Y acquires the assets of Corporation X in a reorganization under section 368(a)(1)(A). Under the plan, J receives 10 shares of Corporation Y stock (fair market value $100) in exchange for the Class A shares and $100 of cash in exchange for the Class B shares. Every share of Corp X and Corp Y stock has a fair market value of $10.
Section 356 recognizes gain on a reorganization exchange only up to the boot (money or other property) received, and never any loss. When the total consideration exceeds the boot, the shareholder must determine how much of each surrendered block’s gain is triggered by boot. Treas. Reg. § 1.356-1(b) generally allocates boot ratably across the surrendered shares — unless the terms of the exchange specify, and it is economically reasonable, that particular consideration is received for particular shares.
Here the terms do specify the pairing: Corp Y stock for the Class A shares and cash for the Class B shares. Because that allocation is economically reasonable, it controls. The Class A block realizes $70 of gain ($100 consideration less $30 basis) but recognizes none, because it received no boot. The Class B block realizes $10 of gain ($100 cash less $90 basis) and recognizes all $10, because the boot ($100) exceeds the realized gain — recognized gain is the lesser of gain realized or boot received.
When a plan of reorganization specifies which consideration is received for which shares and the allocation is economically reasonable, those terms govern the boot computation instead of the default ratable rule.
The Class A shares (basis $30) are exchanged solely for $100 of Corp Y stock. J realizes $70 of gain but recognizes none, because no boot was received for that block.
The Class B shares (basis $90) are exchanged solely for $100 of cash. J realizes $10 of gain and recognizes all $10 — the recognized amount is the lesser of gain realized or boot received.
Gain is tested share-block by share-block. Specifying the terms prevents the stock-heavy Class A consideration from sheltering the cash-driven Class B gain, so total recognized gain is $10.
