In Tseytin, T.C. Memo. 2015-247, the Tax Court discussed the application of the "boot" rules under Sec. 356 in a tax-free reorganization where one block of shares had an unrealized gain and another block of shares had an unrealized loss.
Generally, no gain or loss is recognized if stock or securities in a corporation that is a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in that corporation or in another corporation that is a party to the reorganization (Sec. 354). If a corporation distributes to a shareholder with respect to its stock, or to a security holder in exchange for its securities, solely stock or securities of another corporation that it controls immediately before the distribution, and certain other requirements are satisfied, generally, no gain or loss is recognized by the shareholder or security holder upon the receipt of the controlled corporations stock or securities pursuant to Sec. 355. ("Control" is defined in Sec. 368(c) as ownership of at least 80% of the total combined voting power and 80% of the total number of shares of all other classes of stock.) The distributing corporation also receives nonrecognition treatment on the distribution of that stock or securities.
The reorganization in Tseytin involved a considerable amount of boot (i.e., consideration other than stock in the acquirer, including cash), which triggered substantial capital gain recognition. The taxpayer, Michael Tseytin, attempted to offset this gain with a loss on another block of stock that he purchased immediately before the reorganization.
Sec. 356(a) provides that if the nonrecognition rules under Sec. 354 or 355 would apply to an exchange but for the fact that the property received in the exchange consists of property other than stock or securities (i.e., boot), then the gain, if any, to the recipient shall be recognized to the extent of the sum of money received and/or the fair market value (FMV) of any other property received. Sec. 356(c) disallows recognition of a loss on an exchange or distribution if the nonrecognition rules of Sec. 354 or 355 would apply to the exchange or distribution but for the fact that property other than stock or securities is also received in the exchange.
In Rev. Rul. 68-23, the IRS determined that if a taxpayer holds blocks of stock that have different tax bases, for purposes of Sec. 356, the taxpayer must compute gain or loss on a transaction...