The Solely-for-Voting-Stock Requirement in “B” Reorganizations Satisfied by Cash Payments for Fractional Shares-Mills v. Commissioner

The Internal Revenue Code requires recognition of gains or losses realized upon a sale or exchange of property. An exception to this general rule is found in section 354(a)(1), the basic nonrecognition provision for stock-for-stock reorganizations. This section provides that a stockholder need not recognize gains or losses “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.” However, before section 354 can be reached, the exchange must satisfy one of the definitions of reorganization found in section 368. Unless one of these definitional requirements is met, section 354 will be inapplicable and all gains and losses must be fully realized. On the other hand, even though section 368 is satisfied, section 354 will not be applicable if property other than stock or securities has been transferred to a shareholder in the acquired corporation. In that situation a companion clause, section 356, the so-called “boot” provision, requires total nonrecognition of losses and the recognition of gains but in an amount not to exceed the fair market value of the boot received.