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payment of previously taxed income reflected in Central’s
accumulated adjustments account.
OPINION
As a general rule, any gain recognized on the sale or
exchange of property is taxable. However, the Internal Revenue
Code provides that certain transactions may occur in such a way
that ownership interests are exchanged, yet no taxable event is
deemed to have taken place. One instance where nonrecognition is
provided involves corporate reorganizations that come within the
provisions of section 368. The income tax regulations explain
the rationale behind the reorganization provisions as follows:
Under the general rule, upon the exchange of property,
gain or loss must be accounted for if the new property
differs in a material particular, either in kind or in
extent, from the old property. The purpose of the
reorganization provisions of the Code is to except from
the general rule certain specifically described
exchanges incident to such readjustments of corporate
structures made in one of the particular ways specified
in the Code, as are required by business exigencies and
which effect only a readjustment of continuing interest
in property under modified corporate forms. Requisite
to a reorganization under the Code are a continuity of
the business enterprise under the modified corporate
form, and (except as provided in section 368(a)(1)(D))
a continuity of interest therein on the part of those
persons who, directly or indirectly, were the owners of
the enterprise prior to the reorganization. * * * [Sec.
1.368-1(b), Income Tax Regs.]
Shareholders generally do not recognize gain or loss when
stock in a corporation that is a party to a reorganization is,
pursuant to a plan of reorganization, exchanged solely for stock
in another corporation that is a party to the reorganization.
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