§ 306. Dispositions of certain stock
(a)
General rule
If a shareholder sells or otherwise disposes of section
306 stock (as defined in subsection (c))—
(1)
Dispositions other than redemptions
(A)
The amount realized shall be treated as ordinary income. This subparagraph shall not apply to the extent that—
(ii)
such stock’s ratable share of the amount which would have been a dividend at the time of distribution if (in lieu of section
306 stock) the corporation had distributed money in an amount equal to the fair market value of the stock at the time of distribution.
(2)
Redemption
If the disposition is a redemption, the amount realized shall be treated as a distribution of property to which section
301 applies.
(b)
Exceptions
Subsection (a) shall not apply—
(1)
Termination of shareholder’s interest, etc.
(3)
Where gain or loss is not recognized
To the extent that, under any provision of this subtitle, gain or loss to the shareholder is not recognized with respect to the disposition of the section
306 stock.
(4)
Transactions not in avoidance
If it is established to the satisfaction of the Secretary—
(B)
in the case of a prior or simultaneous disposition (or redemption) of the stock with respect to which the section
306 stock disposed of (or redeemed) was issued, that the disposition (or redemption) of the section
306 stock,
was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax.
(c)
Section
306 stock defined
(1)
In general
For purposes of this subchapter, the term “section
306 stock” means stock which meets the requirements of subparagraph (A), (B), or (C) of this paragraph.
(B)
Received in a corporate reorganization or separation
Stock which is not common stock and—
(i)
which was received, by the shareholder selling or otherwise disposing of such stock, in pursuance of a plan of reorganization (within the meaning of section
368
(a)), or in a distribution or exchange to which section
355 (or so much of section
356 as relates to section
355) applied, and
(ii)
with respect to the receipt of which gain or loss to the shareholder was to any extent not recognized by reason of part III, but only to the extent that either the effect of the transaction was substantially the same as the receipt of a stock dividend, or the stock was received in exchange for section
306 stock.
For purposes of this section, a receipt of stock to which the foregoing provisions of this subparagraph apply shall be treated as a distribution of stock.
(C)
Stock having transferred or substituted basis
Except as otherwise provided in subparagraph (B), stock the basis of which (in the hands of the shareholder selling or otherwise disposing of such stock) is determined by reference to the basis (in the hands of such shareholder or any other person) of section
306 stock.
(2)
Exception where no earnings and profits
For purposes of this section, the term “section
306 stock” does not include any stock no part of the distribution of which would have been a dividend at the time of the distribution if money had been distributed in lieu of the stock.
(3)
Certain stock acquired in section
351 exchange
The term “section
306 stock” also includes any stock which is not common stock acquired in an exchange to which section
351 applied if receipt of money (in lieu of the stock) would have been treated as a dividend to any extent. Rules similar to the rules of section
304
(b)(2) shall apply—
(B)
for purposes of determining the application of this section to any subsequent disposition of stock which is section
306 stock by reason of an exchange described in the preceding sentence.
(e)
Convertible stock
For purposes of subsection (c)—
(1)
if section
306 stock was issued with respect to common stock and later such section
306 stock is exchanged for common stock in the same corporation (whether or not such exchange is pursuant to a conversion privilege contained in the section
306 stock), then (except as provided in paragraph (2)) the common stock so received shall not be treated as section
306 stock; and
(f)
Source of gain
The amount treated under subsection (a)(1)(A) as ordinary income shall, for purposes of part I of subchapter N (sec.
861 and following, relating to determination of sources of income), be treated as derived from the same source as would have been the source if money had been received from the corporation as a dividend at the time of the distribution of such stock. If under the preceding sentence such amount is determined to be derived from sources within the United States, such amount shall be considered to be fixed or determinable annual or periodical gains, profits, and income within the meaning of section
871
(a) or section
881
(a), as the case may be.
(g)
Change in terms and conditions of stock
If a substantial change is made in the terms and conditions of any stock, then, for purposes of this section—
(1)
the fair market value of such stock shall be the fair market value at the time of the distribution or at the time of such change, whichever such value is higher;