Reg. § 1.356-4 Exchanges for section 306 stock.
If, in a transaction to which section is applicable, other property or money is received in exchange for section stock, an amount equal to the fair market value of the property plus the money, if any, shall be treated as a distribution of property to which section is applicable. The determination of whether section stock is surrendered for other property (including money) is a question of fact to be decided under all of the circumstances of each case. Ordinarily, the other property (including money) received will first be treated as received in exchange for any section stock owned by a shareholder prior to such transaction. For example, if a shareholder who owns a share of common stock (having a basis to him of $100) and a share of preferred stock which is section stock (having a basis to him of $100) surrenders both shares in a transaction to which section is applicable for one share of common stock having a fair market value of $80 and one $100 bond having a fair market value of $100, the bond will be deemed received in exchange for the section stock and it will be treated as a distribution to which section is applicable to the extent of its entire fair market value ($100).