26 U.S.C. § 305: Distributions of stock and stock rights

Except as otherwise provided in this section, gross income does not include the amount of any distribution of the stock of a corporation made by such corporation to its shareholders with respect to its stock. in its stock, or in property. the receipt of property by some shareholders, and an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation. the receipt of preferred stock by some common shareholders, and the receipt of common stock by other common shareholders. If the distribution is with respect to preferred stock, other than an increase in the conversion ratio of convertible preferred stock made solely to take account of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible. If the distribution is of convertible preferred stock, unless it is established to the satisfaction of the Secretary that such distribution will not have the result described in paragraph (2). where the issuer of stock is required to redeem the stock at a specified time or the holder of stock has the option to require the issuer to redeem the stock, a redemption premium resulting from such requirement or option shall be treated as reasonable only if the amount of such premium does not exceed the amount determined under the principles of section 1273(a)(3), a redemption premium shall not fail to be treated as a distribution (or series of distributions) merely because the stock is callable, and in any case in which a redemption premium is treated as a distribution (or series of distributions), such premium shall be taken into account under principles similar to the principles of section 1272(a). For purposes of this section, the term “stock” includes rights to acquire such stock. For purposes of subsections (b) and (c), the term “shareholder” includes a holder of rights or of convertible securities. the redemption price for such stock, over the price at which such person purchased such stock. Appropriate adjustments to basis shall be made for amounts includible in gross income under paragraph (1). If any person strips the rights to 1 or more dividends from any stock described in paragraph (5)(B) and after April 30, 1993 , disposes of such dividend rights, for purposes of paragraph (1), such person shall be treated as having purchased the stripped preferred stock on the date of such disposition for a purchase price equal to such person’s adjusted basis in such stripped preferred stock. Any amount included in gross income under paragraph (1) shall be treated as ordinary income. The term “stripped preferred stock” means any stock described in subparagraph (B) if there has been a separation in ownership between such stock and any dividend on such stock which has not become payable. is limited and preferred as to dividends and does not participate in corporate growth to any significant extent, and has a fixed redemption price. any acquisition of stock, where the basis of such stock is not determined in whole or in part by the reference to the adjusted basis of such stock in the hands of the person from whom acquired. For treatment of stripped interests in certain accounts or entities holding preferred stock, see section 1286(e). Relating to the receipt of stock and stock rights in corporate organizations and reorganizations, see part III (sec. 351 and following). In the case of a distribution which results in a gift, see section 2501 and following. In the case of a distribution which has the effect of the payment of compensation, see section 61(a)(1). Except as provided in paragraph (2), the amendment made by subsection (a) [amending this section] shall apply to stock issued after October 9, 1990 . such stock is issued pursuant to a written binding contract in effect on October 9, 1990 , and at all times thereafter before such issuance, such stock is issued pursuant to a registration or offering statement filed on or before October 9, 1990 , with a Federal or State agency regulating the offering or sale of securities and such stock is issued before the date 90 days after the date of such filing, or such stock is issued pursuant to a plan filed on or before October 9, 1990 , in a title 11 or similar case (as defined in section 368(a)(3)(A) of the Internal Revenue Code of 1986).” Except as otherwise provided in this subsection, the amendment made by subsection (a) [amending this section] shall apply with respect to distributions (or deemed distributions) made after January 10, 1969 , in taxable years ending after such date. Section 305(b)(2) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by subsection (a)) shall not apply to a distribution (or deemed distribution) of stock made before January 1, 1991 , with respect to stock (i) outstanding on January 10, 1969 , (ii) issued pursuant to a contract binding on January 10, 1969 , on the distributing corporation, (iii) which is additional stock of that class of stock which (as of January 10, 1969 ) had the largest fair market value of all classes of stock of the corporation (taking into account only stock outstanding on January 10, 1969 , or issued pursuant to a contract binding on January 10, 1969 ), (iv) described in subparagraph (C)(iii), or (v) issued in a prior distribution described in clause (i), (ii), (iii), or (iv). the stock as to which there is a receipt of property was outstanding on January 10, 1969 (or was issued pursuant to a contract binding on January 10, 1969 , on the distributing corporation), and if such stock and any stock described in subparagraph (A)(i) were also outstanding on January 10, 1968 , a distribution of property was made on or before January 10, 1969 , with respect to such stock, and a distribution of stock was made on or before January 10, 1969 , with respect to such stock described in subparagraph (A)(i). nonconvertible preferred stock. additional stock of that class of stock which meets the requirements of subparagraph (A)(iii), or preferred stock which is convertible into stock which meets the requirements of subparagraph (A)(iii) at a fixed conversion ratio which takes account of all stock dividends and stock splits with respect to the stock into which such convertible stock is convertible. For purposes of this paragraph, the term ‘stock’ includes rights to acquire such stock. In cases to which Treasury Decision 6990 (promulgated January 10, 1969 ) would not have applied, in applying paragraphs (1) and (2) April 22, 1969 , shall be substituted for January 10, 1969 . Section 305(b)(4) of the Internal Revenue Code of 1986 (as added by subsection (a)) shall not apply to any distribution (or deemed distribution) with respect to preferred stock (including any increase in the conversion ratio of convertible stock) made before January 1, 1991 , pursuant to the terms relating to the issuance of such stock which were in effect on January 10, 1969 . With respect to distributions made or considered as made after January 10, 1969 , in taxable years ending after such date, to the extent that the amendment made by subsection (a) [amending this section] does not apply by reason of paragraph (2), (3), or (4) of this subsection, section 305 of the Internal Revenue Code of 1986 (as in effect before the amendment made by subsection (a)) shall continue to apply.”