I.R.C. § 305(a) General Rule —
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.
I.R.C. § 305(b) Exceptions —
Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution
shall be treated as a distribution of property to which
section 301 applies—
I.R.C. § 305(b)(1) Distributions In Lieu Of Money —
If the distribution is, at the election of any of the shareholders (whether exercised
before or after the declaration thereof), payable either—
I.R.C. § 305(b)(1)(A) —
in its stock, or
I.R.C. § 305(b)(1)(B) —
in property.
I.R.C. § 305(b)(2) Disproportionate Distributions —
If the distribution (or a series of distributions of which such distribution is
one) has the result of—
I.R.C. § 305(b)(2)(A) —
the receipt of property by some shareholders, and
I.R.C. § 305(b)(2)(B) —
an increase in the proportionate interests of other shareholders in the assets or
earnings and profits of the corporation.
I.R.C. § 305(b)(3) Distributions Of Common And Preferred Stock —
If the distribution (or a series of distributions of which such distribution is
one) has the result of—
I.R.C. § 305(b)(3)(A) —
the receipt of preferred stock by some common shareholders, and
I.R.C. § 305(b)(3)(B) —
the receipt of common stock by other common shareholders.
I.R.C. § 305(b)(4) Distributions On Preferred Stock —
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.
I.R.C. § 305(b)(5) Distributions Of Convertible Preferred Stock —
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).
I.R.C. § 305(c) Certain Transactions Treated As Distributions —
For purposes of this section and section 301, the Secretary shall prescribe
regulations under which a change in conversion ratio, a change in
redemption price, a difference between redemption price and issue price, a redemption
which is treated as a distribution to which section 301 applies, or any transaction
(including a recapitalization) having a similar effect on the interest of any shareholder
shall be treated as a distribution with respect to any shareholder whose proportionate
interest in the earnings and profits or assets of the corporation is increased by
such change, difference, redemption, or similar transaction. Regulations prescribed
under the preceding sentence shall provide that—
I.R.C. § 305(c)(1) —
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),
I.R.C. § 305(c)(2) —
a redemption premium shall not fail to be treated as a distribution (or series of
distributions) merely because the stock is callable, and
I.R.C. § 305(c)(3) —
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).
I.R.C. § 305(d) Definitions
I.R.C. § 305(d)(1) Rights To Acquire Stock —
For purposes of this section, the term “stock” includes rights to acquire such stock.
I.R.C. § 305(d)(2) Shareholders —
For purposes of subsections (b) and (c), the term “shareholder” includes a holder of rights or of convertible securities.
I.R.C. § 305(e) Treatment Of Purchaser Of Stripped Preferred Stock
I.R.C. § 305(e)(1) In General —
If any person purchases after April 30, 1993, any stripped preferred stock, then
such person, while holding such stock, shall include in gross income amounts equal
to the amounts which would have been so includible if such stripped preferred stock
were a bond issued on the purchase date and having original issue discount equal
to the excess, if any, of—
I.R.C. § 305(e)(1)(A) —
the redemption price for such stock, over
I.R.C. § 305(e)(1)(B) —
the price at which such person purchased such stock.
The preceding sentence shall also apply in the case of any person whose basis in
such stock is determined by reference to the basis in the hands of such purchaser.
I.R.C. § 305(e)(2) Basis Adjustments —
Appropriate adjustments to basis shall be made for amounts includible in gross income
under paragraph (1).
I.R.C. § 305(e)(3) Tax Treatment Of Person Stripping Stock —
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.
I.R.C. § 305(e)(4) Amounts Treated As Ordinary Income —
Any amount included in gross income under paragraph (1) shall be treated as ordinary income.
I.R.C. § 305(e)(5) Stripped Preferred Stock —
For purposes of this subsection—
I.R.C. § 305(e)(5)(A) In General —
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.
I.R.C. § 305(e)(5)(B) Description Of Stock —
Stock is described in this subsection if such stock—
I.R.C. § 305(e)(5)(B)(i) —
is limited and preferred as to dividends and does not participate in corporate growth
to any significant extent, and
I.R.C. § 305(e)(5)(B)(ii) —
has a fixed redemption price.
I.R.C. § 305(e)(6) Purchase —
For purposes of this subsection, the term “purchase”
means—
I.R.C. § 305(e)(6)(A) —
any acquisition of stock, where
I.R.C. § 305(e)(6)(B) —
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.
I.R.C. § 305(e)(7) Cross Reference —
For treatment of stripped interests in certain accounts or entities holding preferred
stock, see section 1286(e).
I.R.C. § 305(f) Cross References —
For special rules—
I.R.C. § 305(f)(1) —
Relating to the receipt of stock and stock rights in corporate organizations and
reorganizations, see part III (sec. 351 and following).
I.R.C. § 305(f)(2) —
In the case of a distribution which results in a gift, see section 2501 and
following.
I.R.C. § 305(f)(3) —
In the case of a distribution which has the effect of the payment of compensation,
see section 61(a)(1).
(Aug. 16, 1954, ch. 736, 68A Stat. 90; Dec. 30, 1969,
Pub. L. 91-172, title IV, Sec. 421(a), 83 Stat. 614; Oct. 4, 1976, Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A), 90 Stat. 1834;
Aug. 13, 1981, Pub. L. 97-34, title III, Sec. 321(a), (b), 95 Stat. 287, 289; Jan. 12, 1983, Pub. L. 97-448, title I, Sec. 103(f), 96 Stat. 2378;
Nov. 5, 1990, Pub. L. 101-508, title XI, Sec. 11322(a), 11801(a)(17), (c)(7), 104 Stat. 1388-463, 1388-521, 1388-524;
Aug. 10, 1993, Pub. L. 103-66, title XIII, Sec. 13206(c)(1); Oct. 22, 2004, Pub. L. 108-357, title VIII, Sec. 831(b), 118 Stat. 1418; Pub. L. 115-141, Div. U, title IV, Sec. 401(c)(2)(D), Mar. 23, 2018, 132 Stat. 348.)
BACKGROUND NOTES
AMENDMENTS
2018 -
Subsec. (e)(7). Pub. L. 115-141, Div. U, Sec. 401(c)(2)(D), amended par. (7) by substituting “1286(e)”
for “1286(f)”.
2004 - Subsec. (e)(7). Pub. L. 108-357, Sec. 831(b), amended subsec. (e) by adding par. (7).
1993 - Subsec. (e)-(f). Pub. L. 103-66, Sec. 13206(c)(1), redesignated subsec. (e) as subsec. (f) and added a new subsec. (e).
1990 - Subsec. (c). Pub. L. 101-508, Sec. 11322(a), inserted sentence at end specifying the contents of regulations.
Subsec. (d)(1). Pub. L. 101-508, Sec. 11801(c)(7)(A), struck out ‘(other than subsection (e))’ after ‘this section’.
Subsecs. (e), (f). Pub. L. 101-508, Sec. 11801(a)(17),
(c)(7)(B), redesignated subsec. (f) as (e) and struck out former subsec.
(e) relating to dividend reinvestment in stock of public utilities.
1983 - Subsec. (e)(3)(A). Pub. L. 97-448, Sec. 103(f)(1), substituted ‘placed in service qualified long-life public utility property having
a cost equal to at least 60 percent of the aggregate cost of all tangible property
described in subparagraph (A) or (B)
of section 1245(a)(3) placed in service by the corporation during such period’ for
‘acquired public utility recovery property having a cost equal to at least 60 percent
of the aggregate cost of all tangible property described in section 1245(a)(3) (other
than subparagraphs
(C) and (D) thereof) acquired by the corporation during such period’.
Subsec. (e)(3)(C)(ii). Pub. L. 97-448, Sec. 103(f)(2), substituted definition of ‘qualified long-life public utility property’
for definition of ‘public utility recovery property’ which had been defined as public
utility property (within the meaning of section 167(l)(3)(A)) which was recovery property
which was 10-year property or 15-year public utility property (within the meaning
of section 168), except that any requirement that the property be placed in service
after December 31, 1980, did not apply.
1981 - Subsec. (d)(1). Pub. L. 97-34, Sec. 321(b), inserted
‘(other than subsection (e))’ after ‘this section’.
Subsecs. (e), (f). Pub. L. 97-34, Sec. 321(a), added subsec. (e) and redesignated former subsec. (e) as (f).
1976 - Subsecs. (b)(5), (c). Pub. L. 94-455 struck out ‘or his delegate’
after ‘Secretary’.
1969 - Subsec. (a). Pub. L. 91-172 substituted reference to this section for reference to subsec. (b), and omitted reference
to rights to acquire its stock.
Subsec. (b). Pub. L. 91-172 omitted reference to rights to acquire its stock, in text preceding par. (1), redesignated
former par. (2) as par. (1) and added pars. (2) to (5). Former par. (1), providing
for the extent to which distribution of preference dividends were to be treated as
distribution of property to which section 301 applied, was struck out.
Subsecs. (c) to (e). Pub. L. 91-172 added subsecs. (c) and (d) and redesignated former subsec. (c) as (e).
EFFECTIVE DATE OF 2018 AMENDMENT
Amendment by Pub. L. No. 115-141, Div. U, 401(c)(2)(D), effective for bonds purchased on or after July 2, 1982.
EFFECTIVE DATE OF 2004 AMENDMENT
Amendment by Section 831(b) of Pub. L. 108-357 applicable to purchases and dispositions after the date of the enactment of this
Act [Enacted:
Oct. 22, 2004].
EFFECTIVE DATE OF 1993 AMENDMENT
Amendment by Section 13206(c)(1) of Pub. L. 103-66 effective on April 30, 1993.
EFFECTIVE DATE OF 1990 AMENDMENT
Section 11322(b) of Pub. L. 101-508 provided that:
‘(1) In general. - Except as provided in paragraph
(2), the amendment made by subsection (a) (amending this section)
shall apply to stock issued after October 9, 1990.
‘(2) Exception. - The amendment made by subsection
(a) shall not apply to any stock issued after October 9, 1990, if
-
‘(A) such stock is issued pursuant to a written binding contract in effect on October
9, 1990, and at all times thereafter before such issuance,
‘(B) 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
‘(C) 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 Codeof 1986).'
EFFECTIVE DATE OF 1983 AMENDMENT
Amendment by Pub. L. 97-448 effective, except as otherwise provided, as if it had been included in the provision
of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, to which such amendment relates, see section 109 of Pub. L. 97-448, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1981 AMENDMENT
Section 321(c) of Pub. L. 97-34 provided that: ‘The amendments made by this section
(amending this section) shall apply to distributions after December 31, 1981, in taxable
years ending after such date.’
EFFECTIVE DATE OF 1969 AMENDMENT
Section 421(b) of Pub. L. 91-172, as amended by Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
‘(1) 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.
‘(2)(A) 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).
‘(B) Subparagraph (A) shall apply only if -
‘(i) 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
‘(ii) 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).
‘(C) Subparagraph (A) shall cease to apply when at any time after October 9, 1969,
the distributing corporation issues any of its stock (other than in a distribution
of stock with respect to stock of the same class) which is not -
‘(i) nonconvertible preferred stock.
‘(ii) additional stock of that class of stock which meets the requirements of subparagraph
(A)(iii), or
‘(iii) 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.
‘(D) For purposes of this paragraph, the term ‘stock’
includes rights to acquire such stock.
‘(3) 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.
‘(4) 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.
‘(5) 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.'
SAVINGS PROVISION
For provisions that nothing in amendment by section 11801(a)(17), (c)(7) of Pub. L. 101-508 be construed to affect treatment of certain transactions occurring, property acquired,
or items of income, loss, deduction, or credit taken into account prior to Nov. 5,
1990, for purposes of determining liability for tax for periods ending after Nov.
5, 1990, see section 11821(b)
of Pub. L. 101-508, set out as a note under section 29 of this title.
