---
kind: "range"
citation: "26 C.F.R. §§ 1.355-1–1.355-4"
title: "26"
from: "1.355-1"
to: "1.355-4"
count: 4
url: "https://uscodex.org/cfr/26/1.355-1..1.355-4"
---

# §1.355-1. Distribution of stock and securities of a controlled corporation.

- (a) **Effective/applicability date of certain sections.** Except as otherwise provided, this section and [§§ 1.355-2 through 1.355-4](/cfr/26/1.355-2..1.355-4.md) apply to transactions occurring after February 6, 1989. For transactions occurring on or before that date, see [26 CFR 1.355-1 through 1.355-4](/cfr/26/1.355-1..1.355-4.md) (revised as of April 1, 1987). This section and [§§ 1.355-2 through 1.355-4](/cfr/26/1.355-2..1.355-4.md), other than § [1.355-2(g)](/cfr/26/1.355-2.md?p=g) and [(i)](/cfr/26/1.355-2.md?p=i), do not reflect the amendments to [section 355](/cfr/26/355.md) made by the Revenue Act of 1987, the Technical and Miscellaneous Revenue Act of 1988, and the Tax Technical Corrections Act of 2007. For the applicability date of §§ [1.355-2(g)](/cfr/26/1.355-2.md?p=g), [1.355-5](/cfr/26/1.355-5.md), [1.355-6](/cfr/26/1.355-6.md), and [1.355-7](/cfr/26/1.355-7.md), see §§ [1.355-2(i)](/cfr/26/1.355-2.md?p=i), [1.355-5(e)](/cfr/26/1.355-5.md?p=e), [1.355-6(g)](/cfr/26/1.355-6.md?p=g), and [1.355-7(k)](/cfr/26/1.355-7.md?p=k), respectively.
- (b) **Application of section.** [Section 355](/cfr/26/355.md) provides for the separation, without recognition of gain or loss to (or the inclusion in income of) the shareholders and security holders, of one or more existing businesses formerly operated, directly or indirectly, by a single corporation (the “distributing corporation”). It applies only to the separation of existing businesses that have been in active operation for at least five years (or a business that has been in active operation for at least five years into separate businesses), and which, in general, have been owned, directly or indirectly, for at least five years by the distributing corporation. A separation is achieved through the distribution by the distributing corporation of stock, or stock and securities, of one or more subsidiaries (the “controlled corporations”) to its shareholders with respect to its stock or to its security holders in exchange for its securities. The controlled corporations may be preexisting or newly created subsidiaries. Throughout the regulations under [section 355](/cfr/26/355.md), the term distribution refers to a distribution by the distributing corporation of stock, or stock and securities, of one or more controlled corporations, unless the context indicates otherwise. [Section 355](/cfr/26/355.md) contemplates the continued operation of the business or businesses existing prior to the separation. See [§ 1.355-4](/cfr/26/1.355-4.md) for types of distributions that may qualify under [section 355](/cfr/26/355.md), including pro rata distributions and non pro rata distributions.
- (c) **Stock rights.** Except as provided in [§ 1.356-6](/cfr/26/1.356-6.md), for purposes of [section 355](/cfr/26/355.md), the term securities includes rights issued by the distributing corporation or the controlled corporation to acquire the stock of that corporation. For purposes of this section and [section 356(d)(2)(B)](/cfr/26/356.md?p=d-2-B), a right to acquire stock has no principal amount. For this purpose, rights to acquire stock has the same meaning as it does under sections [305](/cfr/26/305.md) and [317(a)](/cfr/26/317.md?p=a). Other Internal Revenue Code provisions governing the treatment of rights to acquire stock may also apply to certain distributions occurring in connection with a transaction described in [section 355](/cfr/26/355.md). See, for example, sections [83](/cfr/26/83.md) and [421 through 424](/cfr/26/421..424.md) and the regulations thereunder. This [paragraph (c)](#c) applies to distributions occurring on or after March 9, 1998.
- (d) **Nonqualified preferred stock.** See § [1.356-7(a)](/cfr/26/1.356-7.md?p=a) and [(b)](/cfr/26/1.356-7.md?p=b) for the treatment of nonqualified preferred stock (as defined in [section 351(g)(2)](/cfr/26/351.md?p=g-2)) received in certain exchanges for (or in certain distributions with respect to) nonqualified preferred stock or preferred stock. See [§ 1.356-7(c)](/cfr/26/1.356-7.md?p=c) for the treatment of the receipt of preferred stock in certain exchanges for (or in certain distributions with respect to) common or preferred stock described in [section 351(g)(2)(C)(i)(II)](/cfr/26/351.md?p=g-2-C-i-II).

# §1.355-2. Limitations.

- (a) **Property distributed.** [Section 355](/cfr/26/355.md) applies to a distribution only if the property distributed consists solely of stock, or stock and securities, of a controlled corporation. If additional property (including an excess principal amount of securities received over securities surrendered) is received, see [section 356](/cfr/26/356.md).
- (b) **Independent business purpose—**
  - (1) **Independent business purpose requirement.** [Section 355](/cfr/26/355.md) applies to a transaction only if it is carried out for one or more corporate business purposes. A transaction is carried out for a corporate business purpose if it is motivated, in whole or substantial part, by one or more corporate business purposes. The potential for the avoidance of Federal taxes by the distributing or controlled corporations (or a corporation controlled by either) is relevant in determining the extent to which an existing corporate business purpose motivated the distribution. The principal reason for this business purpose requirement is to provide nonrecognition treatment only to distributions that are incident to readjustments of corporate structures required by business exigencies and that effect only readjustments of continuing interests in property under modified corporate forms. This business purpose requirement is independent of the other requirements under [section 355](/cfr/26/355.md).
  - (2) **Corporate business purpose.** A corporate business purpose is a real and substantial non Federal tax purpose germane to the business of the distributing corporation, the controlled corporation, or the affiliated group (as defined in [§ 1.355-3(b)(4)(iv)](/cfr/26/1.355-3.md?p=b-4-iv)) to which the distributing corporation belongs. A purpose of reducing non Federal taxes is not a corporate business purpose if (i) the transaction will effect a reduction in both Federal and non Federal taxes because of similarities between Federal tax law and the tax law of the other jurisdiction and (ii) the reduction of Federal taxes is greater than or substantially coextensive with the reduction of non Federal taxes. See Examples (7) and (8) of [paragraph (b)(5)](#b-5) of this section. A shareholder purpose (for example, the personal planning purposes of a shareholder) is not a corporate business purpose. Depending upon the facts of a particular case, however, a shareholder purpose for a transaction may be so nearly coextensive with a corporate business purpose as to preclude any distinction between them. In such a case, the transaction is carried out for one or more corporate business purposes. See Example (2) of [paragraph (b)(5)](#b-5) of this section.
  - (3) **Business purpose for distribution.** The distribution must be carried out for one or more corporate business purposes. See Example (3) of [paragraph (b)(5)](#b-5) of this section. If a corporate business purpose can be achieved through a nontaxable transaction that does not involve the distribution of stock of a controlled corporation and which is neither impractical nor unduly expensive, then, for purposes of [paragraph (b)(1)](#b-1) of this section, the separation is not carried out for that corporate business purpose. See Examples (3) and (4) of [paragraph (b)(5)](#b-5) of this section. For rules with respect to the requirement of a business purpose for a transfer of assets to a controlled corporation in connection with a reorganization described in [section 368(a)(1)(D)](/cfr/26/368.md?p=a-1-D), See [§ 1.368-1(b)](/cfr/26/1.368-1.md?p=b).
  - (4) **Business purpose as evidence of nondevice.** The corporate business purpose or purposes for a transaction are evidence that the transaction was not used principally as a device for the distribution of earnings and profits within the meaning of [section 355(a)(1)(B)](/cfr/26/355.md?p=a-1-B). See [paragraph (d)(3)(ii)](#d-3-ii) of this section.
  - (5) **Examples.** The provisions of this [paragraph (b)](#b) may be illustrated by the following examples:
- (c) **Continuity of interest requirement—**
  - (1) **Requirement.** [Section 355](/cfr/26/355.md) applies to a separation that effects only a readjustment of continuing interests in the property of the distributing and controlled corporations. In this regard [section 355](/cfr/26/355.md) requires that one or more persons who, directly or indirectly, were the owners of the enterprise prior to the distribution or exchange own, in the aggregate, an amount of stock establishing a continuity of interest in each of the modified corporate forms in which the enterprise is conducted after the separation. This continuity of interest requirement is independent of the other requirements under [section 355](/cfr/26/355.md).
  - (2) **Examples.**
- (d) **Device for distribution of earnings and profits—**
  - (1) **In general.** [Section 355](/cfr/26/355.md) does not apply to a transaction used principally as a device for the distribution of the earnings and profits of the distributing corporation, the controlled corporation, or both (a “device”). [Section 355](/cfr/26/355.md) recognizes that a tax-free distribution of the stock of a controlled corporation presents a potential for tax avoidance by facilitating the avoidance of the dividend provisions of the Code through the subsequent sale or exchange of stock of one corporation and the retention of the stock of another corporation. A device can include a transaction that effects a recovery of basis. In this [paragraph (d)](#d), “exchange” includes transactions, such as redemptions, treated as exchanges under the Code. Generally, the determination of whether a transaction was used principally as a device will be made from all of the facts and circumstances, including, but not limited to, the presence of the device factors specified in [paragraph (d)(2)](#d-2) of this section (“evidence of device”), and the presence of the nondevice factors specified in [paragraph (d)(3)](#d-3) of this section (“evidence of nondevice”). However, if a transaction is specified in [paragraph (d)(5)](#d-5) of this section, then it is ordinarily considered not to have been used principally as a device.
  - (2) **Device factors—**
    - (i) **In general.** The presence of any of the device factors specified in this [subparagraph (2)](#d-2) is evidence of device. The strength of this evidence depends on the facts and circumstances.
    - (ii) **Pro rata distribution.** A distribution that is pro rata or substantially pro rata among the shareholders of the distributing corporation presents the greatest potential for the avoidance of the dividend provisions of the Code and, in contrast to other types of distributions, is more likely to be used principally as a device. Accordingly, the fact that a distribution is pro rata or substantially pro rata is evidence of device.
    - (iii) **Subsequent sale or exchange of stock—**
      - (A) **In general.** A sale or exchange of stock of the distributing or the controlled corporation after the distribution (a “subsequent sale or exchange”) is evidence of device. Generally, the greater the percentage of the stock sold or exchanged after the distribution, the stronger the evidence of device. In addition, the shorter the period of time between the distribution and the sale or exchange, the stronger the evidence of device.
      - (B) **Sale or exchange negotiated or agreed upon before the distribution.** A subsequent sale or exchange pursuant to an arrangement negotiated or agreed upon before the distribution is substantial evidence of device.
      - (C) **Sale or exchange not negotiated or agreed upon before the distribution.** A subsequent sale or exchange not pursuant to an arrangement negotiated or agreed upon before the distribution is evidence of device.
      - (D) **Negotiated or agreed upon before the distribution.** For purposes of this [subparagraph (2)](#d-2), a sale or exchange is always pursuant to an arrangement negotiated or agreed upon before the distribution if enforceable rights to buy or sell existed before the distribution. If a sale or exchange was discussed by the buyer and the seller before the distribution and was reasonably to be anticipated by both parties, then the sale or exchange will ordinarily be considered to be pursuant to an arrangement negotiated or agreed upon before the distribution.
      - (E) **Exchange in pursuance of a plan of reorganization.** For purposes of this [subparagraph (2)](#d-2), if stock is exchanged for stock in pursuance of a plan of reorganization, and either no gain or loss or only an insubstantial amount of gain is recognized on the exchange, then the exchange is not treated as a subsequent sale or exchange, but the stock received in the exchange is treated as the stock surrendered in the exchange. For this purpose, gain treated as a dividend pursuant to sections [356(a)(2)](/cfr/26/356.md?p=a-2) and [316](/cfr/26/316.md) shall be disregarded.
    - (iv) **Nature and use of assets—**
      - (A) **In general.** The determination of whether a transaction was used principally as a device will take into account the nature, kind, amount, and use of the assets of the distributing and the controlled corporations (and corporations controlled by them) immediately after the transaction.
      - (B) **Assets not used in a trade or business meeting the requirement of section 355(b).** The existence of assets that are not used in a trade or business that satisfies the requirements of [section 355(b)](/cfr/26/355.md?p=b) is evidence of device. For this purpose, assets that are not used in a trade or business that satisfies the requirements of [section 355(b)](/cfr/26/355.md?p=b) include, but are not limited to, cash and other liquid assets that are not related to the reasonable needs of a business satisfying such section. The strength of the evidence of device depends on all the facts and circumstances, including, but not limited to, the ratio for each corporation of the value of assets not used in a trade or business that satisfies the requirements of [section 355(b)](/cfr/26/355.md?p=b) to the value of its business that satisfies such requirements. A difference in the ratio described in the preceding sentence for the distributing and controlled corporation is ordinarily not evidence of device if the distribution is not pro rata among the shareholders of the distributing corporation and such difference is attributable to a need to equalize the value of the stock distributed and the value of the stock or securities exchanged by the distributees.
      - (C) **Related function.** There is evidence of device if a business of either the distributing or controlled corporation (or a corporation controlled by it) is (1) a “secondary business” that continues as a secondary business for a significant period after the separation, and (2) can be sold without adversely affecting the business of the other corporation (or a corporation controlled by it). A secondary business is a business of either the distributing or controlled corporation, if its principal function is to serve the business of the other corporation (or a corporation controlled by it). A secondary business can include a business transferred to a newly-created subsidiary or a business which serves a business transferred to a newly-created subsidiary. The activities of the secondary business may consist of providing property or performing services. Thus, in Example (11) of [§ 1.355-3(c)](/cfr/26/1.355-3.md?p=c), evidence of device would be presented if the principal function of the coal mine (satisfying the requirements of the steel business) continued after the separation and the coal mine could be sold without adversely affecting the steel business. Similarly, in Example (10) of [§ 1.355-3(c)](/cfr/26/1.355-3.md?p=c), evidence of device would be presented if the principal function of the sales operation after the separation is to sell the output from the manufacturing operation and the sales operation could be sold without adversely affecting the manufacturing operation.
  - (3) **Nondevice factors—**
    - (i) **In general.** The presence of any of the nondevice factors specified in this [subparagraph (3)](#d-3) is evidence of nondevice. The strength of this evidence depends on all of the facts and circumstances.
    - (ii) **Corporate business purpose.** The corporate business purpose for the transaction is evidence of nondevice. The stronger the evidence of device (such as the presence of the device factors specified in [paragraph (d)(2)](#d-2) of this section), the stronger the corporate business purpose required to prevent the determination that the transaction was used principally as a device. Evidence of device presented by the transfer or retention of assets not used in a trade or business that satisfies the requirements of [section 355(b)](/cfr/26/355.md?p=b) can be outweighed by the existence of a corporate business purpose for those transfers or retentions. The assessment of the strength of a corporate business purpose will be based on all of the facts and circumstances, including, but not limited to, the following factors:
      - (A) The importance of achieving the purpose to the success of the business;
      - (B) The extent to which the transaction is prompted by a person not having a proprietary interest in either corporation, or by other outside factors beyond the control of the distributing corporation; and
      - (C) **The immediacy of the conditions prompting the transaction.**
    - (iii) **Distributing corporation publicly traded and widely held.** The fact that the distributing corporation is publicly traded and has no shareholder who is directly or indirectly the beneficial owner of more than five percent of any class of stock is evidence of nondevice.
    - (iv) **Distribution to domestic corporate shareholders.** The fact that the stock of the controlled corporation is distributed to one or more domestic corporations that, if [section 355](/cfr/26/355.md) did not apply, would be entitled to a deduction under [section 243(a)(1)](/cfr/26/243.md?p=a-1) available to corporations meeting the stock ownership requirements of [section 243(c)](/cfr/26/243.md?p=c), or a deduction under section [243(a)(2)](/cfr/26/243.md?p=a-2) or [(3)](/cfr/26/243.md?p=a-3) or [245(b)](/cfr/26/245.md?p=b) is evidence of nondevice.
  - (4) **Examples.** The provisions of [paragraph (d)(1) through (3)](#d-1..d-3) of this section may be illustrated by the following examples:
  - (5) **Transactions ordinarily not considered as a device—**
    - (i) **In general.** This [subparagraph (5)](#d-5) specifies three distributions that ordinarily do not present the potential for tax avoidance described in [paragraph (d)(1)](#d-1) of this section. Accordingly, such distributions are ordinarily considered not to have been used principally as a device, notwithstanding the presence of any of the device factors described in [paragraph (d)(2)](#d-2) of this section. A transaction described in paragraph [(d)(5)(iii)](#d-5-iii) or [(iv)](#d-5-iv) of this section is not protected by this [subparagraph (5)](#d-5) from a determination that it was used principally as a device if it involves the distribution of the stock of more than one controlled corporation and facilitates the avoidance of the dividend provisions of the Code through the subsequent sale or exchange of stock of one corporation and the retention of the stock of another corporation.
    - (ii) **Absence of earnings and profits.** A distribution is ordinarily considered not to have been used principally as a device if—
      - (A) The distributing and controlled corporations have no accumulated earnings and profits at the beginning of their respective taxable years,
      - (B) The distributing and controlled corporations have no current earnings and profits as of the date of the distribution, and
      - (C) No distribution of property by the distributing corporation immediately before the separation would require recognition of gain resulting in current earnings and profits for the taxable year of the distribution.
    - (iii) **Section 303(a) transactions.** A distribution is ordinarily considered not to have been used principally as a device if, in the absence of [section 355](/cfr/26/355.md), with respect to each shareholder distributee, the distribution would be a redemption to which [section 303(a)](/cfr/26/303.md?p=a) applied.
    - (iv) **Section 302(a) transactions.** A distribution is ordinarily considered not to have been used principally as a device if, in the absence of [section 355](/cfr/26/355.md), with respect to each shareholder distributee, the distribution would be a redemption to which [section 302(a)](/cfr/26/302.md?p=a) applied. For purposes of the preceding sentence, section [302(c)(2)(A)(ii)](/cfr/26/302.md?p=c-2-A-ii) and [(iii)](/cfr/26/302.md?p=c-2-A-iii) shall not apply.
    - (v) **Examples.** The provisions of this [subparagraph (5)](#d-5) may be illustrated by the following examples:
- (e) **Stock and securities distributed—**
  - (1) **In general.** [Section 355](/cfr/26/355.md) applies to a distribution only if the distributing corporation distributes—
    - (i) All of the stock and securities of the controlled corporation that it owns, or
    - (ii) At least an amount of the stock of the controlled corporation that constitutes control as defined in [section 368(c)](/cfr/26/368.md?p=c). In such a case, all, or any part, of the securities of the controlled corporation may be distributed, and [paragraph (e)(2)](#e-2) of this section shall apply.
  - (2) **Additional rules.** Where a part of either the stock or the securities of the controlled corporation is retained under [paragraph (e)(1)(ii)](#e-1-ii) of this section, it must be established to the satisfaction of the Commissioner that the retention by the distributing corporation was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax. Ordinarily, the corporate business purpose or purposes for the distribution will require the distribution of all of the stock and securities of the controlled corporation. If the distribution of all of the stock and securities of a controlled corporation would be treated to any extent as a distribution of “other property” under [section 356](/cfr/26/356.md), this fact tends to establish that the retention of stock or securities is in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax.
- (f) **Principal amount of securities—**
  - (1) **Securities received.** [Section 355](/cfr/26/355.md) does not apply to a distribution if, with respect to any shareholder or security holder, the principal amount of securities received exceeds the principal amount of securities surrendered, or securities are received but no securities are surrendered. In such cases, see [section 356](/cfr/26/356.md).
  - (2) **Only stock received.** If only stock is received in a distribution to which [section 355(a)(1)(A)](/cfr/26/355.md?p=a-1-A) applies, the principal amount of the securities surrendered, if any, and the par value or stated value of the stock surrendered, if any, are not relevant to the application of that section.
- (g) **Recently acquired controlled stock under section 355(a)(3)(B)—**
  - (1) **Other property.** Except as provided in [paragraph (g)(2)](#g-2) of this section, for purposes of [section 355(a)(1)(A)](/cfr/26/355.md?p=a-1-A), [section 355(c)](/cfr/26/355.md?p=c), and so much of [section 356](/cfr/26/356.md) as relates to [section 355](/cfr/26/355.md), stock of a controlled corporation acquired by the DSAG in a taxable transaction (as defined in [paragraph (g)(4)](#g-4) of this section) within the five-year period ending on the date of the distribution (pre-distribution period) shall not be treated as stock of the controlled corporation but shall be treated as “other property.” Transfers of controlled corporation stock that is owned by the DSAG immediately before and immediately after the transfer are disregarded and are not acquisitions for purposes of this [paragraph (g)(1)](#g-1).
  - (2) **Exceptions.** [Paragraph (g)(1)](#g-1) of this section does not apply to an acquisition of stock of the controlled corporation—
    - (i) If the controlled corporation is a DSAG member at any time after the acquisition (but prior to the distribution); or
    - (ii) Described in [§ 1.355-3(b)(4)(iii)](/cfr/26/1.355-3.md?p=b-4-iii).
  - (3) **DSAG.** For purposes of this [paragraph (g)](#g), a DSAG is the distributing corporation's separate affiliated group (the affiliated group which would be determined under [section 1504(a)](/cfr/26/1504.md?p=a) if such corporation were the common parent and [section 1504(b)](/cfr/26/1504.md?p=b) did not apply) that consists of the distributing corporation as the common parent and all corporations affiliated with the distributing corporation through stock ownership described in [section 1504(a)(1)(B)](/cfr/26/1504.md?p=a-1-B) (regardless of whether the corporations are includible corporations under [section 1504(b)](/cfr/26/1504.md?p=b)). For purposes of [paragraph (g)(1)](#g-1) of this section, any reference to the DSAG is a reference to the distributing corporation if it is not the common parent of a separate affiliated group.
  - (4) **Taxable transaction—**
    - (i) **Generally.** For purposes of this [paragraph (g)](#g), a taxable transaction is a transaction in which gain or loss was recognized in whole or in part.
    - (ii) **Dunn Trust and predecessor issues.** [Reserved]
  - (5) **Examples.** The following examples illustrate this [paragraph (g)](#g). Assume that C, D, P, and S are corporations, X is an unrelated individual, each of the transactions is unrelated to any other transaction and, but for the issue of whether C stock is treated as “other property” under [section 355(a)(3)(B)](/cfr/26/355.md?p=a-3-B), the distributions satisfy all of the requirements of [section 355](/cfr/26/355.md). No inference should be drawn from any of these examples as to whether any requirements of [section 355](/cfr/26/355.md) other than [section 355(a)(3)(B)](/cfr/26/355.md?p=a-3-B), as specified, are satisfied. Furthermore, the following definitions apply:
    - (i) **Purchase—** is an acquisition that is a taxable transaction.
    - (ii) **Section 368(c) stock—** is stock constituting control within the meaning of [section 368(c)](/cfr/26/368.md?p=c).
    - (iii) **Section 1504(a)(2) stock—** is stock meeting the requirements of [section 1504(a)(2)](/cfr/26/1504.md?p=a-2).
- (h) **Active conduct of a trade or business.** [Section 355](/cfr/26/355.md) applies to a distribution only if the requirements of [§ 1.355-3](/cfr/26/1.355-3.md) (relating to the active conduct of a trade or business) are satisfied.
- (i) **Effective/applicability date.** [Paragraphs (g)(1) through (g)(5)](#g-1..g-5) of this section apply to distributions occurring after October 20, 2011. For rules regarding distributions occurring on or before October 20, 2011, see [§ 1.355-2T(i)](/cfr/26/1.355-2T.md?p=i), as contained in [26 CFR part 1](/cfr/26/part1.md), revised as of April 1, 2011.

# §1.355-3. Active conduct of a trade or business.

- (a) **General requirements—**
  - (1) **Application of section 355.** Under [section 355(b)(1)](/cfr/26/355.md?p=b-1), a distribution of stock, or stock and securities, of a controlled corporation qualifies under [section 355](/cfr/26/355.md) only if—
    - (i) The distributing and the controlled corporations are each engaged in the active conduct of a trade or business immediately after the distribution ([section 355(b)(1)(A)](/cfr/26/355.md?p=b-1-A)), or
    - (ii) Immediately before the distribution, the distributing corporation had no assets other than stock or securities of the controlled corporations, and each of the controlled corporations is engaged in the active conduct of a trade or business immediately after the distribution ([section 355(b)(1)(B)](/cfr/26/355.md?p=b-1-B)). A de minimis amount of assets held by the distributing corporation shall be disregarded for purposes of this [paragraph (a)(1)(ii)](#a-1-ii).
  - (2) **Examples.** [Paragraph (a)(1)](#a-1) of this section may be illustrated by the following examples:
- (b) **Active conduct of a trade or business defined—**
  - (1) **In general.** [Section 355(b)(2)](/cfr/26/355.md?p=b-2) provides rules for determining whether a corporation is treated as engaged in the active conduct of a trade or business for purposes of [section 355(b)(1)](/cfr/26/355.md?p=b-1). Under [section 355(b)(2)(A)](/cfr/26/355.md?p=b-2-A), a corporation is treated as engaged in the active conduct of a trade or business if it is itself engaged in the active conduct of a trade or business or if substantially all of its assets consist of the stock, or stock and securities, of a corporation or corporations controlled by it (immediately after the distribution) each of which is engaged in the active conduct of a trade or business.
  - (2) **Active conduct of a trade or business immediately after distribution—**
    - (i) **In general.** For purposes of [section 355(b)](/cfr/26/355.md?p=b), a corporation shall be treated as engaged in the “active conduct of a trade or business” immediately after the distribution if the assets and activities of the corporation satisfy the requirements and limitations described in paragraph [(b)(2)(ii)](#b-2-ii), [(iii)](#b-2-iii), and [(iv)](#b-2-iv) of this section.
    - (ii) **Trade or business.** A corporation shall be treated as engaged in a trade or business immediately after the distribution if a specific group of activities are being carried on by the corporation for the purpose of earning income or profit, and the activities included in such group include every operation that forms a part of, or a step in, the process of earning income or profit. Such group of activities ordinarily must include the collection of income and the payment of expenses.
    - (iii) **Active conduct.** For purposes of [section 355(b)](/cfr/26/355.md?p=b), the determination whether a trade or business is actively conducted will be made from all of the facts and circumstances. Generally, the corporation is required itself to perform active and substantial management and operational functions. Generally, activities performed by the corporation itself do not include activities performed by persons outside the corporation, including independent contractors. A corporation may satisfy the requirements of this subdivision (iii) through the activities that it performs itself, even though some of its activities are performed by others. Separations of real property all or substantially all of which is occupied prior to the distribution by the distributing or the controlled corporation (or by any corporation controlled directly or indirectly by either of those corporations) will be carefully scrutinized with respect to the requirements of [section 355(b)](/cfr/26/355.md?p=b) and this § 1.355-3.
    - (iv) **Limitations.** The active conduct of a trade or business does not include—
      - (A) The holding for investment purposes of stock, securities, land, or other property, or
      - (B) The ownership and operation (including leasing) of real or personal property used in a trade or business, unless the owner performs significant services with respect to the operation and management of the property.
  - (3) **Active conduct for five-year period preceding distribution.** Under [section 355(b)(2)(B)](/cfr/26/355.md?p=b-2-B), a trade or business that is relied upon to meet the requirements of [section 355(b)](/cfr/26/355.md?p=b) must have been actively conducted throughout the five-year period ending on the date of the distribution. For purposes of this [subparagraph (3)](#b-3)—
    - (i) Activities which constitute a trade or business under the tests described in [paragraph (b)(2)](#b-2) of this section shall be treated as meeting the requirement of the preceding sentence if such activities were actively conducted throughout the 5-year period ending on the date of distribution, and
    - (ii) The fact that a trade or business underwent change during the five-year period preceding the distribution (for example, by the addition of new or the dropping of old products, changes in production capacity, and the like) shall be disregarded, provided that the changes are not of such a character as to constitute the acquisition of a new or different business. In particular, if a corporation engaged in the active conduct of one trade or business during that five-year period purchased, created, or otherwise acquired another trade or business in the same line of business, then the acquisition of that other business is ordinarily treated as an expansion of the original business, all of which is treated as having been actively conducted during that five-year period, unless that purchase, creation, or other acquisition effects a change of such a character as to constitute the acquisition of a new or different business.
  - (4) **Special rules for acquisition of a trade or business (Prior to the Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of 1988)—**
    - (i) **In general.** Under [section 355(b)(2)(C)](/cfr/26/355.md?p=b-2-C), a trade or business relied upon to meet the requirements of [section 355(b)](/cfr/26/355.md?p=b) must not have been acquired by the distributing corporation, the controlled corporation, or another member of the affiliated group during the five-year period ending on the date of the distribution unless it was acquired in a transaction in which no gain or loss was recognized. Similarly, under [section 355(b)(2)(D)](/cfr/26/355.md?p=b-2-D), the trade or business must not have been indirectly acquired by any of those corporations (or a predecessor in interest of any of those corporations) during that five-year period in a transaction in which gain or loss was recognized in whole or in part and which consisted of the acquisition of control of the corporation directly engaged in the trade or business, or the indirect acquisition of control of that corporation through the direct or indirect acquisition of control of one or more other corporations. A trade or business acquired, directly or indirectly, within the five-year period ending on the date of the distribution in a transaction in which the basis of the assets acquired was not determined in whole or in part by reference to the transferor's basis does not qualify under [section 355(b)(2)](/cfr/26/355.md?p=b-2), even though no gain or loss was recognized by the transferor.
    - (ii) **Example.** [Paragraph (b)(4)(i)](#b-4-i) of this section may be illustrated by the following example:
    - (iii) **Gain or loss recognized in certain transactions.** The requirements of section [355(b)(2)(C)](/cfr/26/355.md?p=b-2-C) and [(D)](/cfr/26/355.md?p=b-2-D) are intended to prevent the direct or indirect acquisition of a trade or business by a corporation in anticipation of a distribution by the corporation of that trade of business in a distribution to which [section 355](/cfr/26/355.md) would otherwise apply. A direct or indirect acquisition of a trade or business by one member of an affiliated group from another member of the group is not the type of transaction to which section [355(b)(2)(C)](/cfr/26/355.md?p=b-2-C) and [(D)](/cfr/26/355.md?p=b-2-D) is intended to apply. Therefore, in applying section [355(b)(2)(C)](/cfr/26/355.md?p=b-2-C) or [(D)](/cfr/26/355.md?p=b-2-D), such an acquisition, even though taxable, shall be disregarded.
    - (iv) **Affiliated group.** For purposes of this [subparagraph (4)](#b-4), the term affiliated group means an affiliated group as defined in [section 1504(a)](/cfr/26/1504.md?p=a) (without regard to [section 1504(b)](/cfr/26/1504.md?p=b)), except that the term stock includes nonvoting stock described in [section 1504(a)(4)](/cfr/26/1504.md?p=a-4).
  - (5) **Special rules for acquisition of a trade or business (After the Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of 1988).** [Reserved]
- (c) **Examples.** The following examples illustrate section [355(b)(2)(A)](/cfr/26/355.md?p=b-2-A) and [(B)](/cfr/26/355.md?p=b-2-B) and paragraph [(b)(1)](#b-1), [(2)](#b-2), and [(3)](#b-3) of this section. However, a transaction that satisfies these active business requirements will qualify under [section 355](/cfr/26/355.md) only if it satisfies the other requirements of section [355 (a)](/cfr/26/355.md?p=a) and [(b)](/cfr/26/355.md?p=b).

# §1.355-4. Non pro rata distributions, etc.


[Section 355](/cfr/26/355.md) provides for nonrecognition of gain or loss with respect to a distribution whether or not (a) the distribution is pro rata with respect to all of the shareholders of the distributing corporation, (b) the distribution is pursuant to a plan of reorganization within the meaning of [section 368 (a)](/cfr/26/368.md?p=a) (1)(D), or (c) the shareholder surrenders stock in the distributing corporation. Under [section 355](/cfr/26/355.md), the stock of a controlled corporation may consist of common stock or preferred stock. (See, however, [section 306](/cfr/26/306.md) and the regulations thereunder.) [Section 355](/cfr/26/355.md) does not apply, however, if the substance of a transaction is merely an exchange between shareholders or security holders of stock or securities in one corporation for stock or securities in another corporation. For example, if two individuals, A and B, each own directly 50 percent of the stock of corporation X and 50 percent of the stock of corporation Y, [section 355](/cfr/26/355.md) would not apply to a transaction in which A and B transfer all of their stock of X and Y to a new corporation Z, for all of the stock of Z, and Z then distributes the stock of X to A and the stock of Y to B.