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INTERNAL REVENUE CODE OF 1954
(3) LIMITATION.—Paragraph (1) shall not apply if— (A) the principal amount of the securities in the controlled corporation which are received exceeds the principal amount of the securities which are surrendered in connection with such distribution, or (B) securities in the controlled corporation are received and no securities are surrendered in connection with such distribution. For purposes of this section (other than paragraph (1)(D) of this subsection) and so much of section 356 as relates to this section, stock of a controlled corporation acquired by the distributing corporation by reason of any transaction which occurs within 5 years of the distribution of such stock and in which gain or loss was recognized in whole or in part, shall not be treated as stock of such controlled corporation, but as other property. (4) CROSS REPERENCE.— For treatment of the distribution if any property is received which is not permitted to be received under this subsection (including an excess principal amount of securities received over securities surrendered), see section 356. (b)
REQUIREMENTS AS TO ACT IV E B U S I N E S S. —
(1) IN GENERAL.—Subsection (a) shall apply only if either— (A) the distributing corporation, and the controlled corporation (or, if stock of more than one controlled corporation is distributed, each of such corporations), is engaged immediately after the distribution in the active conduct of a trade or business, or (B) immediately before the distribution, the distributing corporation had no assets other than stock or securities in the controlled corporations and each of the controlled corporations is engaged immediately after the distribution in the active conduct of a trade or business. (2) DEFINITION.^—For purposes of paragraph (1), a corporation shall be treated as engaged in the active conduct of a trade or business if and only if— (A) it is engaged in the active conduct of a trade or business, or substantially all of its assets consist of stock and securities of a corporation controlled by it (immediately after the distribution) which is so engaged, (B) such trade or business has been actively conducted throughout the 5-year period ending on the date of the distribution, (C) such trade or business was not acquired within the period described in subparagraph (B) in a transaction in which gain or loss was recognized in whole or in part, and (D) control of a corporation which (at the time of acquisition of control) was conducting such trade or business— (i) was not acquired directly (or through one or more corporations) by another corporation within the period described in subparagraph (B), or (ii) was so acquired by another corporation within such period, but such control was so acquired only by reason of transactions in which gain or loss was not recognized in whole or in part, or only by reason of such transactions combined with acquisitions before the beginning of such period. § 355(a)(3)
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