26 U.S.C. § 301: Distributions of property

Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c). For purposes of this section, the amount of any distribution shall be the amount of money received, plus the fair market value of the other property received. the amount of any liability of the corporation assumed by the shareholder in connection with the distribution, and the amount of any liability to which the property received by the shareholder is subject immediately before, and immediately after, the distribution. For purposes of this section, fair market value shall be determined as of the date of the distribution. That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income. That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock. Except as provided in subparagraph (B), that portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of property. That portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock and to the extent that it is out of increase in value accrued before March 1, 1913 , shall be exempt from tax. The basis of property received in a distribution to which subsection (a) applies shall be the fair market value of such property. Except to the extent otherwise provided in regulations, solely for purposes of determining the taxable income of any 20 percent corporate shareholder (and its adjusted basis in the stock of the distributing corporation), section 312 shall be applied with respect to the distributing corporation as if it did not contain subsections (k) and (n) thereof. stock in the corporation making the distribution possessing at least 20 percent of the total combined voting power of all classes of stock entitled to vote, or at least 20 percent of the total value of all stock of the distributing corporation (except nonvoting stock which is limited and preferred as to dividends), The reference in paragraph (1) to subsection (n) of section 312 shall be treated as not including a reference to paragraph (7) of such subsection. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection. For distributions in redemption of stock, see section 302. For distributions in complete liquidation, see part II (sec. 331 and following). For distributions in corporate organizations and reorganizations, see part III (sec. 351 and following). For taxation of dividends received by individuals at capital gain rates, see section 1(h)(11). for purposes of determining earnings and profits, such amendment shall be deemed to be in effect for all periods whether before, on, or after December 15, 1987 , but such amendment shall not affect the determination of whether any distribution on or before December 15, 1987 , is a dividend and the amount of any reduction in accumulated earnings and profits on account of any such distribution. The amendment made by paragraph (1) shall not apply for purposes of determining gain or loss on any disposition of stock after December 15, 1987 , and before January 1, 1989 , if such disposition is pursuant to a written binding contract, governmental order, letter of intent or preliminary agreement, or stock acquisition agreement, in effect on or before December 15, 1987 .”