26 C.F.R. § 1.374-1 Exchanges by insolvent railroad corporations.
Title 26 - Internal Revenue
(a) Exchange solely for stock or securities. (1) Section 374(a)(1) provides for the nonrecognition of gain or loss by an insolvent railroad corporation upon certain exchanges made in connection with the reorganization of the corporation. In order to qualify as a section 374(a) reorganization, the transaction must satisfy the express statutory requirements as well as the underlying assumptions and purposes for which the exchange is excepted from the general rule requiring the recognition of gain or loss upon the exchange of property. (2) Section 374(a)(1) applies only with respect to a reorganization effected in one of two specified types of court proceedings: (i) Receivership proceedings, or (ii) proceedings under section 77 of the Bankruptcy Act (11 U.S.C. 205). The specific statutory requirements are the transfer after July 31, 1955, of property of a railroad corporation, as defined in section 77(m) of the Bankruptcy Act (11 U.S.C. 205(m)), in pursuance of an order of the court having jurisdiction of the corporation in such proceeding, to another railroad corporation, as defined in section 77(m) of the Bankruptcy Act, organized or made use of to effectuate a plan of reorganization approved by the court in such proceeding, in exchange solely for stock or securities in such other railroad corporation. If the consideration for the transfer consists of other property or money as well as stock and securities, see section 374(a)(2) and (3) and paragraph (b) of this section. As to the assumption of liabilities in an exchange described in section 374(a), see section 357 and paragraph (a)(1) and (2) of §1.357–1 and paragraph (a) of §1.357–2. (3) The application of section 374(a)(1) is to be strictly limited to a transaction of the character set forth in such section. Hence, the section is inapplicable unless there is a bona fide plan of reorganization approved by the court having jurisdiction of the proceeding and the transfer of the property of the insolvent railroad corporation is made pursuant to such plan. It is unnecessary that the transfer be a direct transfer from the insolvent railroad corporation; it is sufficient if the transfer is an integral step in the consummation of the reorganization plan approved by the court. By its terms, the section has no application to a reorganization consummated by adjustment of the capital or debt structure of the insolvent railroad corporation without the transfer of its assets to another railroad corporation. (4) As used in section 374(a)(1), the term reorganization is not controlled by the definition of reorganization contained in section 368. However, certain basic requirements, implicit in the statute, which are essential to a reorganization under section 368, are likewise essential to qualify a transaction as a reorganization under section 374(a)(1). Among these requirements are a continuity of the business enterprise under the modified corporate form and a continuity of interest therein on the part of those persons who were the owners of the enterprise prior to the reorganization. Thus, the nonrecognition accorded by section 374(a)(1) applies only to a genuine reorganization as distinguished from a liquidation and sale of property to either new or old interests supplying new capital and discharging the obligations of the old railroad corporation. For the purpose of determining whether the requisite continuity of interest exists, the interest of creditors who have, by appropriate legal steps, obtained effective command of the property of an insolvent railroad corporation is considered as the equivalent of a proprietary interest. But the mere possibility of a proprietary interest is not its equivalent. In general, any transaction will be subject to nonrecognition of gain or loss as prescribed by section 374(a)(1) where the property is transferred to a railroad corporation and the stock and securities of such corporation are transferred to persons who were shareholders or creditors of the transferor railroad corporation as if such stock or securities had been transferred to such persons as shareholders pursuant to the nonrecognition provisions of part III, subchapter C, chapter 1 of the Code. The determinative and controlling factors are the railroad corporation's insolvency and the effective command by the creditors over its property. The term insolvent as used in this section refers to insolvency at any time during the course of the proceeding referred to in section 374(a)(1), either in the sense of excess of liabilities over assets or in the sense of inability to meet obligations as they mature. (5) A short-term purchase money note is not a security within the meaning of this section, and the transfer of the properties of the insolvent railroad corporation for cash and deferred payment obligations of the transferee evidenced by short-term notes is a sale and not an exchange. (b) Exchange for stock or securities and other property or money. If an exchange would be within the provisions of section 374(a)(1) if it were not for the fact that the consideration for the transfer of the property of the insolvent railroad corporation consists not only of stock or securities but also of other property or money, then, as provided in section 374(a)(2), if the other property or money received by the railroad corporation is distributed by it pursuant to the plan of reorganization, no gain to the railroad corporation will be recognized. Property is distributed within the meaning of this section if it is paid over or distributed to shareholders or creditors who have by appropriate legal steps obtained effective command of the property of the railroad corporation. If the other property or money received by the railroad corporation is not distributed by it pursuant to the plan of reorganization, the gain, if any, to the railroad corporation from the exchange will be recognized in an amount not in excess of the sum of money and the fair market value of the other property so received which is not distributed. In either case no loss from the exchange will be recognized (see section 374(a)(3)). See section 354(c) relative to exchanges by stock or security holders. [T.D. 6528, 26 FR 400, Jan. 19, 1961]
Title 26: Internal Revenue
PART 1—INCOME TAXES
Insolvency Reorganizations
§ 1.374-1 Exchanges by insolvent railroad corporations.
