ART. 112(b) (1)-1. Property held for productive use in trade or business or for investment.-As used in section 112(b) (1), the words "like kind" have reference to the nature or character of the property and not to its grade or quality. One kind or class of property may not. under this paragraph, be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved is not material, for such fact relates only to the grade or quality of the property and not to its kind or class. Unproductive real estate held by one other than a dealer for future use or future realization of the increment in value is held for investment and not primarily for sale. No gain or loss is recognized if (1) a taxpayer exchanges property held for productive use in his trade or business, together with cash, for other property of like kind for the same use, such as a truck for a new truck or a passenger automobile for a new passenger automobile to be used for a like purpose, or (2) a taxpayer who is not a dealer in real estate exchanges city real estate for a ranch or farm, or a leasehold of a fee with 30 years or more to run for real estate, or improved real estate for unimproved real estate, or (3) a taxpayer exchanges investment property and cash for investment property. Gain or loss is recognized if a taxpayer exchanges (1) Fourth Liberty loan 44 per cent bonds for new Treasury bonds maturing October 15, 1945, or (2) a real estate mortgage for bonds of the Home Owners' Loan Corporation. [SEC. 112. RECOGNITION OF GAIN OR LOSS.] (2) STOCK FOR STOCK OF SAME CORPORATION.--No gain or loss shall be recognized if common stock in a corporation is exchanged solely for common stock in the same corporation, or if preferred stock in a corporation is exchanged solely for preferred stock in the same corporation. ART. 112(b) (2)-1. Stock for stock of the same corporation. The exchange of common stock for common stock, or of preferred stock for preferred stock, in the same corporation is not limited to a transaction between a stockholder and the corporation; it includes an exchange between two individual stockholders. However, gain or loss will be recognized if stock is exchanged for bonds, or preferred stock is exchanged for common stock, or common stock is exchanged for preferred stock in the same corporation, unless the exchange is made in connection with a reorganization." If a taxpayer exchanges common stock in one corporation for common stock in another corporation gain or loss is recognized unless the exchange is made in connection with a "reorganization." 94759-35--13 66 [SEC. 112. RECOGNITION OF GAIN OR LOSS.] [(b) Exchanges solely in kind.-] (3) STOCK FOR STOCK ON REORGANIZATION.-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 a party to the reorganization.1 (4) SAME-GAIN OF CORPORATION.-No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.1 (5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR.-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 of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. ART. 112(b) (5)-1. Transfer of property to corporation controlled by transferor. As used in section 112(b) (5), the phrase "one or more persons" includes individuals, trusts or estates, partnerships and corporations (see section 801); and to be in "control" of the transferee corporation such person or persons must own immediately after the transfer at least 80 per cent of the voting stock and at least 80 per cent of the total number of shares of all other classes of stock of such corporation. (See section 112 (h).) The phrase "immediately after the exchange " does not necessarily require simultaneous exchanges by two or more persons, but comprehends a situation where the rights of the parties have been previously defined and the execution of the agreement proceeds with an expedition consistent with orderly procedure. Example 1: A owns certain real estate which cost him $50,000 in 1920, but which has a fair market value of $150,000 in 1934. He transfers this property to the M Corporation, a newly formed company, for all the latter's capital stock. No gain or loss is recognized from the transaction. Example 2: C owns a patent right worth $25,000 and D owns a manufacturing plant, worth $75,000. C and D organize the R Corporation with an authorized capital stock of $100,000. C transfers his patent right to the R Corporation for $25,000 of its stock and D 1 For a discussion of the scope of reorganization exchanges which are excepted from the general rule with respect to the recognition of gain or loss, and for the definition of the term reorganization " and related terms, see section 112(g) and articles 112(g)-1 to 112(g)-6. transfers his plant to the new corporation for $75,000 of its stock. No gain or loss to C or D is recognized. Example 3: B owns certain real estate which cost him $50,000 in 1920, but which has a fair market value of $200,000 in 1934. He transfers the property to the N Corporation in 1934 for 78 per cent of all classes of stock of the corporation, the remaining 22 per cent of the stock of the corporation having been issued by the corporation in 1933 to other persons for cash. B realizes a taxable gain of $150,000 on this transaction. (See section 112 (h).) ART. 112(b) (5)-2. Records to be kept and information to be filed.Every person who claims the benefit of a tax-free exchange of property for the stock or securities of a controlled corporation under section 112(b) (5) shall file with his income tax return for the taxable year in which the exchange takes place: 1. A description of the property transferred, or of his interest in such property, together with a statement of the cost or other basis thereof, adjusted to the date of the transfer, and 2. A statement of the amount of stock or securities and other property or money received in the exchange. The amount of each kind of stock or securities and other property received shall be set forth at its fair market value at the date of the exchange. Every such controlled corporation shall file with its income tax return for the taxable year in which the exchange takes place: (1) A full description of all property received from the transferors, together with a statement of the cost or other basis thereof in the hands of the transferors adjusted to the date of the transfer, and (2) A statement of the amount of stock or securities and other property or money which passed to the transferors in the transaction, together with a full statement of the amount of the issued and outstanding stock and securities of such controlled corporation immediately after the exchange. Permanent records in substantial form shall be kept by every taxpayer who participates in a tax-free exchange under section 112(b) (5) showing the cost or other basis in his hands of the transferred property, and of the amount of stock or securities and other property or money received, in order to facilitate the determination of gain or loss from a subsequent disposition of such stock or securities and other property received in the exchange. [SEC. 112. RECOGNITION OF GAIN OR LOSS.] (c) Gain from exchanges not solely in kind. (1) If an exchange would be within the provisions of subsection (b) (1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess (2) If a distribution made in pursuance of a plan of reorgani- ART. 112(c)-1. Receipt of other property or money in tax-free exchange not connected with corporate reorganization.-If in any transaction in which (a) property held for investment or productive use in trade or business is exchanged for property of like kind to be held either for productive use or for investment; or (b) common stock is exchanged for common stock, or preferred stock for preferred stock, in the same corporation and not in connection with a corporate reorganization; or (c) property is transferred by one or more persons to a corporation for its stock or securities, within the meaning of section 112 (b) (5), there is received by the taxpayer other property (in addition to property permitted to be received without recognition of gain) or money, then (1) The gain, if any, to the taxpayer will be recognized in an amount not in excess of the sum of the money and the fair market value of the other property, but (2) No loss from such an exchange will be recognized in any case (see section 112 (e)). Example: A, who is not a dealer in real estate, in 1934 exchanges real estate, which he purchased (for investment) in 1921 for $5,000, for other real estate (to be held for productive use in trade or business) which has a fair market value of $6,000, and he receives in addition $2,000 in cash. The gain from the transaction is $3,000, but is recognized only to the extent of the cash received of $2,000. See article 113 (a)(6)−1 for the basis for determining the gain or loss from the subsequent sale of the property received in exchanges such as described in this article. As to the receipt of other property or money on an exchange of stock or securities in connection with a reorganization, and as to distributions in pursuance of a plan of reorganization which have the effect of a taxable dividend, see article 112(g)−3. [SEC. 112. RECOGNITION OF GAIN OR LOSS.] (d) Same-Gain of corporation.—If an exchange would be within the provisions of subsection (b) (4) of this section if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then-1 (1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but (2) If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, 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 so distributed. (e) Loss from exchanges not solely in kind.—If an exchange would be within the provisions of subsection (b) (1) to (5), inclusive, of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized. ART. 112(e)-1. Nonrecognition of loss.-The Act provides that in no event shall a loss be recognized from a tax-free exchange of property under section 112 (b) (1) to (5), inclusive, notwithstanding the fact that there is received in the exchange other property or money in addition to property permitted to be received without recognition of gain or loss. As to the effect on the basis of the property received in such an exchange for the purpose of determining gain or loss from the subsequent sale thereof, see article 113 (a) (6)-1. [SEC. 112. RECOGNITION OF GAIN OR LOSS.] (f) Involuntary conversions. If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended. ART. 112(f)-1. Reinvestment of proceeds of involuntary conversion.— In order to avail himself of the benefits of section 112 (f) it is not sufficient for the taxpayer to show that subsequent to the receipt of money from a condemnation award he purchased other property similar or related in use. The taxpayer must trace the proceeds of 1 For a discussion of the application of section 112(d), see article 112(g)-3. |