An Attempt to Distinguish Between a Section 351 Transfer and a B Reorganization

This paper explores the overlap between Code Section 351 and Code Section 368(a)(1)(B) when there is a transfer of stock in one corporation for stock in another corporation, detailing the distinction between the two in basis calculations. If Section 351 is deemed to be controlling, the basis in the stock received is required to be determined using the aggregate (averaging) method. If the B reorganization rules are deemed to be controlling, the basis in the stock received is required to be determined using the tracing method. The effect of this distinction can be substantial to the taxpayer. There is no authority indicating which code section takes precedent, even though there are multiple court cases, Revenue Rulings, and Treasury Regulations that document the simultaneous application of these two code sections in a single situation. This uncertainty as to which code section should control adds unnecessary complexity when trying to achieve a specific tax result and runs the risk of being re-characterized by the IRS. In an attempt to reduce this uncertainty, this paper provides a recommendation as to which code section should take precedent, supported by Treasury Reg. §1.358-2(a)(2)(viii) and five arguments that support the conclusion that Code Section 368(a)(1)(B) should take priority