TITLE 26 - US CODE - PART I - DISTRIBUTIONS BY CORPORATIONS

Subpart A - Effects on Recipients

26 USC 301 - Distributions of property

(a) In general 
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).
(b) Amount distributed 

(1) General rule 
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.
(2) Reduction for liabilities 
The amount of any distribution determined under paragraph (1) shall be reduced (but not below zero) by
(A) the amount of any liability of the corporation assumed by the shareholder in connection with the distribution, and
(B) the amount of any liability to which the property received by the shareholder is subject immediately before, and immediately after, the distribution.
(3) Determination of fair market value 
For purposes of this section, fair market value shall be determined as of the date of the distribution.
(c) Amount taxable 
In the case of a distribution to which subsection (a) applies
(1) Amount constituting dividend 
That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income.
(2) Amount applied against basis 
That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock.
(3) Amount in excess of basis 

(A) In general 
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.
(B) Distributions out of increase in value accrued before March 1, 1913 
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.
(d) Basis 
The basis of property received in a distribution to which subsection (a) applies shall be the fair market value of such property.
(e) Special rule for certain distributions received by 20 percent corporate shareholder 

(1) In general 
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.
(2) 20 percent corporate shareholder 
For purposes of this subsection, the term 20 percent corporate shareholder means, with respect to any distribution, any corporation which owns (directly or through the application of section 318)
(A) 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
(B) 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),

but only if, but for this subsection, the distributee corporation would be entitled to a deduction under section 243, 244, or 245 with respect to such distribution.

(3) Application of section 312 (n)(7) not affected 
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.
(4) Regulations 
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.
(f) Special rules 

(1) For distributions in redemption of stock, see section 302.
(2) For distributions in complete liquidation, see part II (sec. 331 and following).
(3) For distributions in corporate organizations and reorganizations, see part III (sec. 351 and following).
(4) For taxation of dividends received by individuals at capital gain rates, see section 1 (h)(11).

26 USC 302 - Distributions in redemption of stock

(a) General rule 
If a corporation redeems its stock (within the meaning of section 317 (b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.
(b) Redemptions treated as exchanges 

(1) Redemptions not equivalent to dividends 
Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.
(2) Substantially disproportionate redemption of stock 

(A) In general 
Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder.
(B) Limitation 
This paragraph shall not apply unless immediately after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote.
(C) Definitions 
For purposes of this paragraph, the distribution is substantially disproportionate if
(i) the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time, is less than 80 percent of
(ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time. For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholders ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence. For purposes of the preceding sentence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value.
(D) Series of redemptions 
This paragraph shall not apply to any redemption made pursuant to a plan the purpose or effect of which is a series of redemptions resulting in a distribution which (in the aggregate) is not substantially disproportionate with respect to the shareholder.
(3) Termination of shareholder’s interest 
Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.
(4) Redemption from noncorporate shareholder in partial liquidation 
Subsection (a) shall apply to a distribution if such distribution is
(A) in redemption of stock held by a shareholder who is not a corporation, and
(B) in partial liquidation of the distributing corporation.
(5) Application of paragraphs 
In determining whether a redemption meets the requirements of paragraph (1), the fact that such redemption fails to meet the requirements of paragraph (2), (3), or (4) shall not be taken into account. If a redemption meets the requirements of paragraph (3) and also the requirements of paragraph (1), (2), or (4), then so much of subsection (c)(2) as would (but for this sentence) apply in respect of the acquisition of an interest in the corporation within the 10-year period beginning on the date of the distribution shall not apply.
(c) Constructive ownership of stock 

(1) In general 
Except as provided in paragraph (2) of this subsection, section 318 (a) shall apply in determining the ownership of stock for purposes of this section.
(2) For determining termination of interest 

(A) In the case of a distribution described in subsection (b)(3), section 318(a)(1) shall not apply if
(i) immediately after the distribution the distributee has no interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor,
(ii) the distributee does not acquire any such interest (other than stock acquired by bequest or inheritance) within 10 years from the date of such distribution, and
(iii) the distributee, at such time and in such manner as the Secretary by regulations prescribes, files an agreement to notify the Secretary of any acquisition described in clause (ii) and to retain such records as may be necessary for the application of this paragraph.

If the distributee acquires such an interest in the corporation (other than by bequest or inheritance) within 10 years from the date of the distribution, then the periods of limitation provided in sections 6501 and 6502 on the making of an assessment and the collection by levy or a proceeding in court shall, with respect to any deficiency (including interest and additions to the tax) resulting from such acquisition, include one year immediately following the date on which the distributee (in accordance with regulations prescribed by the Secretary) notifies the Secretary of such acquisition; and such assessment and collection may be made notwithstanding any provision of law or rule of law which otherwise would prevent such assessment and collection.

(B) Subparagraph (A) of this paragraph shall not apply if
(i) any portion of the stock redeemed was acquired, directly or indirectly, within the 10-year period ending on the date of the distribution by the distributee from a person the ownership of whose stock would (at the time of distribution) be attributable to the distributee under section 318 (a), or
(ii) any person owns (at the time of the distribution) stock the ownership of which is attributable to the distributee under section 318 (a) and such person acquired any stock in the corporation, directly or indirectly, from the distributee within the 10-year period ending on the date of the distribution, unless such stock so acquired from the distributee is redeemed in the same transaction.

The preceding sentence shall not apply if the acquisition (or, in the case of clause (ii), the disposition) by the distributee did not have as one of its principal purposes the avoidance of Federal income tax.

(C) Special rule for waivers by entities 

(i) In general Subparagraph (A) shall not apply to a distribution to any entity unless
(I) such entity and each related person meet the requirements of clauses (i), (ii), and (iii) of subparagraph (A), and
(II) each related person agrees to be jointly and severally liable for any deficiency (including interest and additions to tax) resulting from an acquisition described in clause (ii) of subparagraph (A).

In any case to which the preceding sentence applies, the second sentence of subparagraph (A) and subparagraph (B)(ii) shall be applied by substituting distributee or any related person for distributee each place it appears.

(ii) Definitions For purposes of this subparagraph
(I) the term entity means a partnership, estate, trust, or corporation; and
(II) the term related person means any person to whom ownership of stock in the corporation is (at the time of the distribution) attributable under section 318 (a)(1) if such stock is further attributable to the entity under section 318 (a)(3).
(d) Redemptions treated as distributions of property 
Except as otherwise provided in this subchapter, if a corporation redeems its stock (within the meaning of section 317 (b)), and if subsection (a) of this section does not apply, such redemption shall be treated as a distribution of property to which section 301 applies.
(e) Partial liquidation defined 

(1) In general 
For purposes of subsection (b)(4), a distribution shall be treated as in partial liquidation of a corporation if
(A) the distribution is not essentially equivalent to a dividend (determined at the corporate level rather than at the shareholder level), and
(B) the distribution is pursuant to a plan and occurs within the taxable year in which the plan is adopted or within the succeeding taxable year.
(2) Termination of business 
The distributions which meet the requirements of paragraph (1)(A) shall include (but shall not be limited to) a distribution which meets the requirements of subparagraphs (A) and (B) of this paragraph:
(A) The distribution is attributable to the distributing corporations ceasing to conduct, or consists of the assets of, a qualified trade or business.
(B) Immediately after the distribution, the distributing corporation is actively engaged in the conduct of a qualified trade or business.
(3) Qualified trade or business 
For purposes of paragraph (2), the term qualified trade or business means any trade or business which
(A) was actively conducted throughout the 5-year period ending on the date of the redemption, and
(B) was not acquired by the corporation within such period in a transaction in which gain or loss was recognized in whole or in part.
(4) Redemption may be pro rata 
Whether or not a redemption meets the requirements of subparagraphs (A) and (B) of paragraph (2) shall be determined without regard to whether or not the redemption is pro rata with respect to all of the shareholders of the corporation.
(5) Treatment of certain pass-thru entities 
For purposes of determining under subsection (b)(4) whether any stock is held by a shareholder who is not a corporation, any stock held by a partnership, estate, or trust shall be treated as if it were actually held proportionately by its partners or beneficiaries.
(f) Cross references 
For special rules relating to redemption
(1) Death Taxes.— 
Of stock to pay death taxes, see section 303.
(2) Section 306 Stock.— 
Of section 306 stock, see section 306.
(3) Liquidations.— 
Of stock in complete liquidation, see section 331.

26 USC 303 - Distributions in redemption of stock to pay death taxes

(a) In general 
A distribution of property to a shareholder by a corporation in redemption of part or all of the stock of such corporation which (for Federal estate tax purposes) is included in determining the gross estate of a decedent, to the extent that the amount of such distribution does not exceed the sum of
(1) the estate, inheritance, legacy, and succession taxes (including any interest collected as a part of such taxes) imposed because of such decedents death, and
(2) the amount of funeral and administration expenses allowable as deductions to the estate under section 2053 (or under section 2106 in the case of the estate of a decedent nonresident, not a citizen of the United States),

shall be treated as a distribution in full payment in exchange for the stock so redeemed.

(b) Limitations on application of subsection (a) 

(1) Period for distribution 
Subsection (a) shall apply only to amounts distributed after the death of the decedent and
(A) within the period of limitations provided in section 6501 (a) for the assessment of the Federal estate tax (determined without the application of any provision other than section 6501 (a)), or within 90 days after the expiration of such period,
(B) if a petition for redetermination of a deficiency in such estate tax has been filed with the Tax Court within the time prescribed in section 6213, at any time before the expiration of 60 days after the decision of the Tax Court becomes final, or
(C) if an election has been made under section 6166 and if the time prescribed by this subparagraph expires at a later date than the time prescribed by subparagraph (B) of this paragraph, within the time determined under section 6166 for the payment of the installments.
(2) Relationship of stock to decedent’s estate 

(A) In general 
Subsection (a) shall apply to a distribution by a corporation only if the value (for Federal estate tax purposes) of all of the stock of such corporation which is included in determining the value of the decedents gross estate exceeds 35 percent of the excess of
(i) the value of the gross estate of such decedent, over
(ii) the sum of the amounts allowable as a deduction under section 2053 or 2054.
(B) Special rule for stock of two or more corporations 
For purposes of subparagraph (A), stock of 2 or more corporations, with respect to each of which there is included in determining the value of the decedents gross estate 20 percent or more in value of the outstanding stock, shall be treated as the stock of a single corporation. For purposes of the 20-percent requirement of the preceding sentence, stock which, at the decedents death, represents the surviving spouses interest in property held by the decedent and the surviving spouse as community property or as joint tenants, tenants by the entirety, or tenants in common shall be treated as having been included in determining the value of the decedents gross estate.
(3) Relationship of shareholder to estate tax 
Subsection (a) shall apply to a distribution by a corporation only to the extent that the interest of the shareholder is reduced directly (or through a binding obligation to contribute) by any payment of an amount described in paragraph (1) or (2) of subsection (a).
(4) Additional requirements for distributions made more than 4 years after decedent’s death 
In the case of amounts distributed more than 4 years after the date of the decedents death, subsection (a) shall apply to a distribution by a corporation only to the extent of the lesser of
(A) the aggregate of the amounts referred to in paragraph (1) or (2) of subsection (a) which remained unpaid immediately before the distribution, or
(B) the aggregate of the amounts referred to in paragraph (1) or (2) of subsection (a) which are paid during the 1-year period beginning on the date of such distribution.
(c) Stock with substituted basis 
If
(1) a shareholder owns stock of a corporation (referred to in this subsection as new stock) the basis of which is determined by reference to the basis of stock of a corporation (referred to in this subsection as old stock),
(2) the old stock was included (for Federal estate tax purposes) in determining the gross estate of a decedent, and
(3) subsection (a) would apply to a distribution of property to such shareholder in redemption of the old stock,

then, subject to the limitation specified in subsection (b), subsection (a) shall apply in respect of a distribution in redemption of the new stock.

(d) Special rules for generation-skipping transfers 
Where stock in a corporation is the subject of a generation-skipping transfer (within the meaning of section 2611 (a)) occurring at the same time as and as a result of the death of an individual
(1) the stock shall be deemed to be included in the gross estate of such individual;
(2) taxes of the kind referred to in subsection (a)(1) which are imposed because of the generation-skipping transfer shall be treated as imposed because of such individuals death (and for this purpose the tax imposed by section 2601 shall be treated as an estate tax);
(3) the period of distribution shall be measured from the date of the generation-skipping transfer; and
(4) the relationship of stock to the decedents estate shall be measured with reference solely to the amount of the generation-skipping transfer.

26 USC 304 - Redemption through use of related corporations

(a) Treatment of certain stock purchases 

(1) Acquisition by related corporation (other than subsidiary) 
For purposes of sections 302 and 303, if
(A) one or more persons are in control of each of two corporations, and
(B) in return for property, one of the corporations acquires stock in the other corporation from the person (or persons) so in control,

then (unless paragraph (2) applies) such property shall be treated as a distribution in redemption of the stock of the corporation acquiring such stock. To the extent that such distribution is treated as a distribution to which section 301 applies, the transferor and the acquiring corporation shall be treated in the same manner as if the transferor had transferred the stock so acquired to the acquiring corporation in exchange for stock of the acquiring corporation in a transaction to which section 351 (a) applies, and then the acquiring corporation had redeemed the stock it was treated as issuing in such transaction.

(2) Acquisition by subsidiary 
For purposes of sections 302 and 303, if
(A) in return for property, one corporation acquires from a shareholder of another corporation stock in such other corporation, and
(B) the issuing corporation controls the acquiring corporation,

then such property shall be treated as a distribution in redemption of the stock of the issuing corporation.

(b) Special rules for application of subsection (a) 

(1) Rules for determinations under section 302 (b) 
In the case of any acquisition of stock to which subsection (a) of this section applies, determinations as to whether the acquisition is, by reason of section 302 (b), to be treated as a distribution in part or full payment in exchange for the stock shall be made by reference to the stock of the issuing corporation. In applying section 318 (a) (relating to constructive ownership of stock) with respect to section 302 (b) for purposes of this paragraph, sections 318 (a)(2)(C) and 318 (a)(3)(C) shall be applied without regard to the 50 percent limitation contained therein.
(2) Amount constituting dividend 
In the case of any acquisition of stock to which subsection (a) applies, the determination of the amount which is a dividend (and the source thereof) shall be made as if the property were distributed
(A) by the acquiring corporation to the extent of its earnings and profits, and
(B) then by the issuing corporation to the extent of its earnings and profits.
(3) Coordination with section 351 

(A) Property treated as received in redemption 
Except as otherwise provided in this paragraph, subsection (a) (and not section 351 and not so much of sections 357 and 358 as relates to section 351) shall apply to any property received in a distribution described in subsection (a).
(B) Certain assumptions of liability, etc. 

(i) In general In the case of an acquisition described in section 351, subsection (a) shall not apply to any liability
(I) assumed by the acquiring corporation, or
(II) to which the stock is subject,

if such liability was incurred by the transferor to acquire the stock. For purposes of the preceding sentence, the term stock means stock referred to in paragraph (1)(B) or (2)(A) of subsection (a).

(ii) Extension of obligations, etc. For purposes of clause (i), an extension, renewal, or refinancing of a liability which meets the requirements of clause (i) shall be treated as meeting such requirements.
(iii) Clause (i) does not apply to stock acquired from related person except where complete termination Clause (i) shall apply only to stock acquired by the transferor from a person
(I) none of whose stock is attributable to the transferor under section 318 (a) (other than paragraph (4) thereof), or
(II) who satisfies rules similar to the rules of section 302 (c)(2) with respect to both the acquiring and the issuing corporations (determined as if such person were a distributee of each such corporation).
(C) Distributions incident to formation of bank holding companies 
If
(i) pursuant to a plan, control of a bank is acquired and within 2 years after the date on which such control is acquired, stock constituting control of such bank is transferred to a BHC in connection with its formation,
(ii) incident to the formation of the BHC there is a distribution of property described in subsection (a), and
(iii) the shareholders of the BHC who receive distributions of such property do not have control of such BHC,

then, subsection (a) shall not apply to any securities received by a qualified minority shareholder incident to the formation of such BHC. For purposes of this subparagraph, any assumption of (or acquisition of stock subject to) a liability under subparagraph (B) shall not be treated as a distribution of property.

(D) Definitions and special rule 
For purposes of subparagraph (C) and this subparagraph
(i) Qualified minority shareholder The term qualified minority shareholder means any shareholder who owns less than 10 percent (in value) of the stock of the BHC. For purposes of the preceding sentence, the rules of paragraph (3) of subsection (c) shall apply.
(ii) BHC The term BHC means a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956).
(iii) Special rule in case of BHCs formed before 1985 In the case of a BHC which is formed before 1985, clause (i) of subparagraph (C) shall not apply.
(4) Treatment of certain intragroup transactions 

(A) In general 
In the case of any transfer described in subsection (a) of stock from 1 member of an affiliated group to another member of such group, proper adjustments shall be made to
(i) the adjusted basis of any intragroup stock, and
(ii) the earnings and profits of any member of such group,

to the extent necessary to carry out the purposes of this section.

(B) Definitions 
For purposes of this paragraph
(i) Affiliated group The term affiliated group has the meaning given such term by section 1504 (a).
(ii) Intragroup stock The term intragroup stock means any stock which
(I) is in a corporation which is a member of an affiliated group, and
(II) is held by another member of such group.
(5) Acquisitions by foreign corporations 

(A) In general 
In the case of any acquisition to which subsection (a) applies in which the acquiring corporation is a foreign corporation, the only earnings and profits taken into account under paragraph (2)(A) shall be those earnings and profits
(i) which are attributable (under regulations prescribed by the Secretary) to stock of the acquiring corporation owned (within the meaning of section 958 (a)) by a corporation or individual which is
(I) a United States shareholder (within the meaning of section 951(b)) of the acquiring corporation, and
(II) the transferor or a person who bears a relationship to the transferor described in section 267 (b) or 707 (b), and
(ii) which were accumulated during the period or periods such stock was owned by such person while the acquiring corporation was a controlled foreign corporation.
(B) Regulations 
The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of this paragraph.
(6) Avoidance of multiple inclusions, etc. 
In the case of any acquisition to which subsection (a) applies in which the acquiring corporation or the issuing corporation is a foreign corporation, the Secretary shall prescribe such regulations as are appropriate in order to eliminate a multiple inclusion of any item in income by reason of this subpart and to provide appropriate basis adjustments (including modifications to the application of sections 959 and 961).
(c) Control 

(1) In general 
For purposes of this section, control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote, or at least 50 percent of the total value of shares of all classes of stock. If a person (or persons) is in control (within the meaning of the preceding sentence) of a corporation which in turn owns at least 50 percent of the total combined voting power of all stock entitled to vote of another corporation, or owns at least 50 percent of the total value of the shares of all classes of stock of another corporation, then such person (or persons) shall be treated as in control of such other corporation.
(2) Stock acquired in the transaction 
For purposes of subsection (a)(1)
(A) General rule 
Where 1 or more persons in control of the issuing corporation transfer stock of such corporation in exchange for stock of the acquiring corporation, the stock of the acquiring corporation received shall be taken into account in determining whether such person or persons are in control of the acquiring corporation.
(B) Definition of control group 
Where 2 or more persons in control of the issuing corporation transfer stock of such corporation to the acquiring corporation and, after the transfer, the transferors are in control of the acquiring corporation, the person or persons in control of each corporation shall include each of the persons who so transfer stock.
(3) Constructive ownership 

(A) In general 
Section 318 (a) (relating to constructive ownership of stock) shall apply for purposes of determining control under this section.
(B) Modification of 50-percent limitations in section 318 
For purposes of subparagraph (A)
(i) paragraph (2)(C) of section 318 (a) shall be applied by substituting 5 percent for 50 percent, and
(ii) paragraph (3)(C) of section 318 (a) shall be applied
(I) by substituting 5 percent for 50 percent, and
(II) in any case where such paragraph would not apply but for subclause (I), by considering a corporation as owning the stock (other than stock in such corporation) owned by or for any shareholder of such corporation in that proportion which the value of the stock which such shareholder owned in such corporation bears to the value of all stock in such corporation.

26 USC 305 - Distributions of stock and stock rights

(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.
(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
(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
(A) in its stock, or
(B) in property.
(2) Disproportionate distributions 
If the distribution (or a series of distributions of which such distribution is one) has the result of
(A) the receipt of property by some shareholders, and
(B) an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation.
(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
(A) the receipt of preferred stock by some common shareholders, and
(B) the receipt of common stock by other common shareholders.
(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.
(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).
(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
(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),
(2) a redemption premium shall not fail to be treated as a distribution (or series of distributions) merely because the stock is callable, and
(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).
(d) Definitions 

(1) Rights to acquire stock 
For purposes of this section, the term stock includes rights to acquire such stock.
(2) Shareholders 
For purposes of subsections (b) and (c), the term shareholder includes a holder of rights or of convertible securities.
(e) Treatment of purchaser of stripped preferred stock 

(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
(A) the redemption price for such stock, over
(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.

(2) Basis adjustments 
Appropriate adjustments to basis shall be made for amounts includible in gross income under paragraph (1).
(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 persons adjusted basis in such stripped preferred stock.
(4) Amounts treated as ordinary income 
Any amount included in gross income under paragraph (1) shall be treated as ordinary income.
(5) Stripped preferred stock 
For purposes of this subsection
(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.
(B) Description of stock 
Stock is described in this subsection if such stock
(i) is limited and preferred as to dividends and does not participate in corporate growth to any significant extent, and
(ii) has a fixed redemption price.
(6) Purchase 
For purposes of this subsection, the term purchase means
(A) any acquisition of stock, where
(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.
(7) Cross reference 
For treatment of stripped interests in certain accounts or entities holding preferred stock, see section 1286 (f).
(f) Cross references 
For special rules
(1) Relating to the receipt of stock and stock rights in corporate organizations and reorganizations, see part III (sec. 351 and following).
(2) In the case of a distribution which results in a gift, see section 2501 and following.
(3) In the case of a distribution which has the effect of the payment of compensation, see section 61 (a)(1).

26 USC 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 
If such disposition is not a redemption (within the meaning of section 317 (b))
(A) The amount realized shall be treated as ordinary income. This subparagraph shall not apply to the extent that
(i) the amount realized, exceeds
(ii) such stocks 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.
(B) Any excess of the amount realized over the sum of
(i) the amount treated under subparagraph (A) as ordinary income, plus
(ii) the adjusted basis of the stock,

shall be treated as gain from the sale of such stock.

(C) No loss shall be recognized.
(D) Treatment as dividend.— 
For purposes of section 1 (h)(11) and such other provisions as the Secretary may specify, any amount treated as ordinary income under this paragraph shall be treated as a dividend received from the corporation.
(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. 

(A) Not in redemption 
If the disposition
(i) is not a redemption;
(ii) is not, directly or indirectly, to a person the ownership of whose stock would (under section 318 (a)) be attributable to the shareholder; and
(iii) terminates the entire stock interest of the shareholder in the corporation (and for purposes of this clause, section 318 (a) shall apply).
(B) In redemption 
If the disposition is a redemption and paragraph (3) or (4) of section 302 (b) applies.
(2) Liquidations 
If the section 306 stock is redeemed in a distribution in complete liquidation to which part II (sec. 331 and following) applies.
(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
(A) that the distribution, and the disposition or redemption, or
(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.
(A) Distributed to seller 
Stock (other than common stock issued with respect to common stock) which was distributed to the shareholder selling or otherwise disposing of such stock if, by reason of section 305 (a), any part of such distribution was not includible in the gross income of the shareholder.
(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
(A) for purposes of the preceding sentence, and
(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.
(4) Application of attribution rules for certain purposes 
For purposes of paragraphs (1)(B)(ii) and (3), section 318 (a) shall apply. For purposes of applying the preceding sentence to paragraph (3), the rules of section 304 (c)(3)(B) shall apply.
(d) Stock rights 
For purposes of this section
(1) stock rights shall be treated as stock, and
(2) stock acquired through the exercise of stock rights shall be treated as stock distributed at the time of the distribution of the stock rights, to the extent of the fair market value of such rights at the time of the distribution.
(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
(2) common stock with respect to which there is a privilege of converting into stock other than common stock (or into property), whether or not the conversion privilege is contained in such stock, shall not be treated as common stock.
(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;
(2) such stocks ratable share of the amount which would have been a dividend if money had been distributed in lieu of stock shall be determined as of the time of distribution or as of the time of such change, whichever such ratable share is higher; and
(3) subsection (c)(2) shall not apply unless the stock meets the requirements of such subsection both at the time of such distribution and at the time of such change.

26 USC 307 - Basis of stock and stock rights acquired in distributions

(a) General rule 
If a shareholder in a corporation receives its stock or rights to acquire its stock (referred to in this subsection as new stock) in a distribution to which section 305 (a) applies, then the basis of such new stock and of the stock with respect to which it is distributed (referred to in this section as old stock), respectively, shall, in the shareholders hands, be determined by allocating between the old stock and the new stock the adjusted basis of the old stock. Such allocation shall be made under regulations prescribed by the Secretary.
(b) Exception for certain stock rights 

(1) In general 
If
(A) a corporation distributes rights to acquire its stock to a shareholder in a distribution to which section 305 (a) applies, and
(B) the fair market value of such rights at the time of the distribution is less than 15 percent of the fair market value of the old stock at such time,

then subsection (a) shall not apply and the basis of such rights shall be zero, unless the taxpayer elects under paragraph (2) of this subsection to determine the basis of the old stock and of the stock rights under the method of allocation provided in subsection (a).

(2) Election 
The election referred to in paragraph (1) shall be made in the return filed within the time prescribed by law (including extensions thereof) for the taxable year in which such rights were received. Such election shall be made in such manner as the Secretary may by regulations prescribe, and shall be irrevocable when made.
(c) Cross reference 
For basis of stock and stock rights distributed before June 22, 1954, see section 1052.

Subpart B - Effects on Corporation

26 USC 311 - Taxability of corporation on distribution

(a) General rule 
Except as provided in subsection (b), no gain or loss shall be recognized to a corporation on the distribution (not in complete liquidation) with respect to its stock of
(1) its stock (or rights to acquire its stock), or
(2) property.
(b) Distributions of appreciated property 

(1) In general 
If
(A) a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and
(B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation),

then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value.

(2) Treatment of liabilities 
Rules similar to the rules of section 336 (b) shall apply for purposes of this subsection.
(3) Special rule for certain distributions of partnership or trust interests 
If the property distributed consists of an interest in a partnership or trust, the Secretary may by regulations provide that the amount of the gain recognized under paragraph (1) shall be computed without regard to any loss attributable to property contributed to the partnership or trust for the principal purpose of recognizing such loss on the distribution.

26 USC 312 - Effect on earnings and profits

(a) General rule 
Except as otherwise provided in this section, on the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation (to the extent thereof) shall be decreased by the sum of
(1) the amount of money,
(2) the principal amount of the obligations of such corporation (or, in the case of obligations having original issue discount, the aggregate issue price of such obligations), and
(3) the adjusted basis of the other property, so distributed.
(b) Distributions of appreciated property 
On the distribution by a corporation, with respect to its stock, of any property (other than an obligation of such corporation) the fair market value of which exceeds the adjusted basis thereof
(1) the earnings and profits of the corporation shall be increased by the amount of such excess, and
(2) subsection (a)(3) shall be applied by substituting fair market value for adjusted basis.

For purposes of this subsection and subsection (a), the adjusted basis of any property is its adjusted basis as determined for purposes of computing earnings and profits.

(c) Adjustments for liabilities 
In making the adjustments to the earnings and profits of a corporation under subsection (a) or (b), proper adjustment shall be made for
(1) the amount of any liability to which the property distributed is subject, and
(2) the amount of any liability of the corporation assumed by a shareholder in connection with the distribution.
(d) Certain distributions of stock and securities 

(1) In general 
The distribution to a distributee by or on behalf of a corporation of its stock or securities, of stock or securities in another corporation, or of property, in a distribution to which this title applies, shall not be considered a distribution of the earnings and profits of any corporation
(A) if no gain to such distributee from the receipt of such stock or securities, or property, was recognized under this title, or
(B) if the distribution was not subject to tax in the hands of such distributee by reason of section 305 (a).
(2) Prior distributions 
In the case of a distribution of stock or securities, or property, to which section 115(h) of the Internal Revenue Code of 1939 (or the corresponding provision of prior law) applied, the effect on earnings and profits of such distribution shall be determined under such section 115 (h), or the corresponding provision of prior law, as the case may be.
(3) Stock or securities 
For purposes of this subsection, the term stock or securities includes rights to acquire stock or securities.
[(e) Repealed. Pub. L. 98–369, div. A, title I, § 61(a)(2)(B), July 18, 1984, 98 Stat. 581] 
(f) Effect on earnings and profits of gain or loss and of receipt of tax-free distributions 

(1) Effect on earnings and profits of gain or loss 
The gain or loss realized from the sale or other disposition (after February 28, 1913) of property by a corporation
(A) for the purpose of the computation of the earnings and profits of the corporation, shall (except as provided in subparagraph (B)) be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain, except that no regard shall be had to the value of the property as of March 1, 1913; but
(B) for purposes of the computation of the earnings and profits of the corporation for any period beginning after February 28, 1913, shall be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain.

Gain or loss so realized shall increase or decrease the earnings and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing taxable income under the law applicable to the year in which such sale or disposition was made. Where, in determining the adjusted basis used in computing such realized gain or loss, the adjustment to the basis differs from the adjustment proper for the purpose of determining earnings and profits, then the latter adjustment shall be used in determining the increase or decrease above provided. For purposes of this subsection, a loss with respect to which a deduction is disallowed under section 1091 (relating to wash sales of stock or securities), or the corresponding provision of prior law, shall not be deemed to be recognized.

(2) Effect on earnings and profits of receipt of tax-free distributions 
Where a corporation receives (after February 28, 1913) a distribution from a second corporation which (under the law applicable to the year in which the distribution was made) was not a taxable dividend to the shareholders of the second corporation, the amount of such distribution shall not increase the earnings and profits of the first corporation in the following cases:
(A) no such increase shall be made in respect of the part of such distribution which (under such law) is directly applied in reduction of the basis of the stock in respect of which the distribution was made; and
(B) no such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated between such stock and the property received (or such basis would, but for section 307 (b), be so allocated).
(g) Earnings and profits—increase in value accrued before March 1, 1913 

(1) If any increase or decrease in the earnings and profits for any period beginning after February 28, 1913, with respect to any matter would be different had the adjusted basis of the property involved been determined without regard to its March 1, 1913, value, then, except as provided in paragraph (2), an increase (properly reflecting such difference) shall be made in that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913.
(2) If the application of subsection (f) to a sale or other disposition after February 28, 1913, results in a loss which is to be applied in decrease of earnings and profits for any period beginning after February 28, 1913, then, notwithstanding subsection (f) and in lieu of the rule provided in paragraph (1) of this subsection, the amount of such loss so to be applied shall be reduced by the amount, if any, by which the adjusted basis of the property used in determining the loss exceeds the adjusted basis computed without regard to the value of the property on March 1, 1913, and if such amount so applied in reduction of the decrease exceeds such loss, the excess over such loss shall increase that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913.
(h) Allocation in certain corporate separations and reorganizations 

(1) Section 355 
In the case of a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applies, proper allocation with respect to the earnings and profits of the distributing corporation and the controlled corporation (or corporations) shall be made under regulations prescribed by the Secretary.
(2) Section 368 (a)(1)(C) or (D) 
In the case of a reorganization described in subparagraph (C) or (D) of section 368 (a)(1), proper allocation with respect to the earnings and profits of the acquired corporation shall, under regulations prescribed by the Secretary, be made between the acquiring corporation and the acquired corporation (or any corporation which had control of the acquired corporation before the reorganization).
(i) Distribution of proceeds of loan insured by the United States 
If a corporation distributes property with respect to its stock and if, at the time of distribution
(1) there is outstanding a loan to such corporation which was made, guaranteed, or insured by the United States (or by any agency or instrumentality thereof), and
(2) the amount of such loan so outstanding exceeds the adjusted basis of the property constituting security for such loan, then the earnings and profits of the corporation shall be increased by the amount of such excess, and (immediately after the distribution) shall be decreased by the amount of such excess. For purposes of paragraph (2), the adjusted basis of the property at the time of distribution shall be determined without regard to any adjustment under section 1016 (a)(2) (relating to adjustment for depreciation, etc.). For purposes of this subsection, a commitment to make, guarantee, or insure a loan shall be treated as the making, guaranteeing, or insuring of a loan.
[(j) Repealed. Pub. L. 108–357, title IV, § 413(c)(4), Oct. 22, 2004, 118 Stat. 1507] 
(k) Effect of depreciation on earnings and profits 

(1) General rule 
For purposes of computing the earnings and profits of a corporation for any taxable year beginning after June 30, 1972, the allowance for depreciation (and amortization, if any) shall be deemed to be the amount which would be allowable for such year if the straight line method of depreciation had been used for each taxable year beginning after June 30, 1972.
(2) Exception 
If for any taxable year a method of depreciation was used by the taxpayer which the Secretary has determined results in a reasonable allowance under section 167 (a) and which is the unit-of-production method or other method not expressed in a term of years, then the adjustment to earnings and profits for depreciation for such year shall be determined under the method so used (in lieu of the straight line method).
(3) Exception for tangible property 

(A) In general 
Except as provided in subparagraph (B), in the case of tangible property to which section 168 applies, the adjustment to earnings and profits for depreciation for any taxable year shall be determined under the alternative depreciation system (within the meaning of section 168 (g)(2)).
(B) Treatment of amounts deductible under section 179, 179A, 179B, 179C, 179D, or 179E 
For purposes of computing the earnings and profits of a corporation, any amount deductible under section 179, 179A, 179B, 179C, 179D, or 179E shall be allowed as a deduction ratably over the period of 5 taxable years (beginning with the taxable year for which such amount is deductible under section 179, 179A, 179B, 179C, 179D, or 179E, as the case may be).
(4) Certain foreign corporations 
The provisions of paragraph (1) shall not apply in computing the earnings and profits of a foreign corporation for any taxable year for which less than 20 percent of the gross income from all sources of such corporation is derived from sources within the United States.
(5) Basis adjustment not taken into account 
In computing the earnings and profits of a corporation for any taxable year, the allowance for depreciation (and amortization, if any) shall be computed without regard to any basis adjustment under section 50 (c).
(l) Discharge of indebtedness income 

(1) Does not increase earnings and profits if applied to reduce basis 
The earnings and profits of a corporation shall not include income from the discharge of indebtedness to the extent of the amount applied to reduce basis under section 1017.
(2) Reduction of deficit in earnings and profits in certain cases 
If
(A) the interest of any shareholder of a corporation is terminated or extinguished in a title 11 or similar case (within the meaning of section 368 (a)(3)(A)), and
(B) there is a deficit in the earnings and profits of the corporation,

then such deficit shall be reduced by an amount equal to the paid-in capital which is allocable to the interest of the shareholder which is so terminated or extinguished.

(m) No adjustment for interest paid on certain registration-required obligations not in registered form 
The earnings and profits of any corporation shall not be decreased by any interest with respect to which a deduction is not or would not be allowable by reason of section 163 (f), unless at the time of issuance the issuer is a foreign corporation that is not a controlled foreign corporation (within the meaning of section 957) and the issuance did not have as a purpose the avoidance of section 163(f) of this subsection[1]
(n) Adjustments to earnings and profits to more accurately reflect economic gain and loss 
For purposes of computing the earnings and profits of a corporation, the following adjustments shall be made:
(1) Construction period carrying charges 

(A) In general 
In the case of any amount paid or incurred for construction period carrying charges
(i) no deduction shall be allowed with respect to such amount, and
(ii) the basis of the property with respect to which such charges are allocable shall be increased by such amount.
(B) Construction period carrying charges defined 
For purposes of this paragraph, the term construction period carrying charges means all
(i) interest paid or accrued on indebtedness incurred or continued to acquire, construct, or carry property,
(ii) property taxes, and
(iii) similar carrying charges,

to the extent such interest, taxes, or charges are attributable to the construction period for such property and would be allowable as a deduction in determining taxable income under this chapter for the taxable year in which paid or incurred.

(C) Construction period 
The term construction period has the meaning given the term production period under section 263A (f)(4)(B).
(2) Intangible drilling costs and mineral exploration and development costs 

(A) Intangible drilling costs 
Any amount allowable as a deduction under section 263 (c) in determining taxable income (other than costs incurred in connection with a nonproductive well)
(i) shall be capitalized, and
(ii) shall be allowed as a deduction ratably over the 60-month period beginning with the month in which such amount was paid or incurred.
(B) Mineral exploration and development costs 
Any amount allowable as a deduction under section 616 (a) or 617 in determining taxable income
(i) shall be capitalized, and
(ii) shall be allowed as a deduction ratably over the 120-month period beginning with the later of
(I) the month in which production from the deposit begins, or
(II) the month in which such amount was paid or incurred.
(3) Certain amortization provisions not to apply 
Sections 173 and 248 shall not apply.
(4) LIFO inventory adjustments 

(A) In general 
Earnings and profits shall be increased or decreased by the amount of any increase or decrease in the LIFO recapture amount as of the close of each taxable year; except that any decrease below the LIFO recapture amount as of the close of the taxable year preceding the 1st taxable year to which this paragraph applies to the taxpayer shall be taken into account only to the extent provided in regulations prescribed by the Secretary.
(B) LIFO recapture amount 
For purposes of this paragraph, the term LIFO recapture amount means the amount (if any) by which
(i) the inventory amount of the inventory assets under the first-in, first-out method authorized by section 471, exceeds
(ii) the inventory amount of such assets under the LIFO method.
(C) Definitions 
For purposes of this paragraph
(i) LIFO method The term LIFO method means the method authorized by section 472 (relating to last-in, first-out inventories).
(ii) Inventory assets The term inventory assets means stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year.
(iii) Inventory amount The inventory amount of assets under the first-in, first-out method authorized by section 471 shall be determined
(I) if the corporation uses the retail method of valuing inventories under section 472, by using such method, or
(II) if subclause (I) does not apply, by using cost or market, whichever is lower.
(5) Installment sales 
In the case of any installment sale, earnings and profits shall be computed as if the corporation did not use the installment method.
(6) Completed contract method of accounting 
In the case of a taxpayer who uses the completed contract method of accounting, earnings and profits shall be computed as if such taxpayer used the percentage of completion method of accounting.
(7) Redemptions 
If a corporation distributes amounts in a redemption to which section 302 (a) or 303 applies, the part of such distribution which is properly chargeable to earnings and profits shall be an amount which is not in excess of the ratable share of the earnings and profits of such corporation accumulated after February 28, 1913, attributable to the stock so redeemed.
(8) Special rule for certain foreign corporations 
In the case of a foreign corporation described in subsection (k)(4)
(A) paragraphs (4) and (6) shall apply only in the case of taxable years beginning after December 31, 1985, and
(B) paragraph (5) shall apply only in the case of taxable years beginning after December 31, 1987.
(o) Definition of original issue discount and issue price for purposes of subsection (a)(2) 
For purposes of subsection (a)(2), the terms original issue discount and issue price have the same respective meanings as when used in subpart A of part V of subchapter P of this chapter.
[1] Subsec. (m) was enacted without a period at the end.

Subpart C - Definitions; Constructive Ownership of Stock

26 USC 316 - Dividend defined

(a) General rule 
For purposes of this subtitle, the term dividend means any distribution of property made by a corporation to its shareholders
(1) out of its earnings and profits accumulated after February 28, 1913, or
(2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.

Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection.

(b) Special rules 

(1) Certain insurance company dividends 
The definition in subsection (a) shall not apply to the term dividend as used in subchapter L in any case where the reference is to dividends of insurance companies paid to policyholders as such.
(2) Distributions by personal holding companies 

(A) In the case of a corporation which
(i) under the law applicable to the taxable year in which the distribution is made, is a personal holding company (as defined in section 542), or
(ii) for the taxable year in respect of which the distribution is made under section 563 (b) (relating to dividends paid after the close of the taxable year), or section 547 (relating to deficiency dividends), or the corresponding provisions of prior law, is a personal holding company under the law applicable to such taxable year,

the term dividend also means any distribution of property (whether or not a dividend as defined in subsection (a)) made by the corporation to its shareholders, to the extent of its undistributed personal holding company income (determined under section 545 without regard to distributions under this paragraph) for such year.

(B) For purposes of subparagraph (A), the term distribution of property includes a distribution in complete liquidation occurring within 24 months after the adoption of a plan of liquidation, but
(i) only to the extent of the amounts distributed to distributees other than corporate shareholders, and
(ii) only to the extent that the corporation designates such amounts as a dividend distribution and duly notifies such distributees of such designation, under regulations prescribed by the Secretary, but
(iii) not in excess of the sum of such distributees allocable share of the undistributed personal holding company income for such year, computed without regard to this subparagraph or section 562 (b).
(3) Deficiency dividend distributions by a regulated investment company or real estate investment trust 
The term dividend also means any distribution of property (whether or not a dividend as defined in subsection (a)) which constitutes a deficiency dividend as defined in section 860 (f).

26 USC 317 - Other definitions

(a) Property 
For purposes of this part, the term property means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock).
(b) Redemption of stock 
For purposes of this part, stock shall be treated as redeemed by a corporation if the corporation acquires its stock from a shareholder in exchange for property, whether or not the stock so acquired is cancelled, retired, or held as treasury stock.

26 USC 318 - Constructive ownership of stock

(a) General rule 
For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable
(1) Members of family 

(A) In general 
An individual shall be considered as owning the stock owned, directly or indirectly, by or for
(i) his spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and
(ii) his children, grandchildren, and parents.
(B) Effect of adoption 
For purposes of subparagraph (A)(ii), a legally adopted child of an individual shall be treated as a child of such individual by blood.
(2) Attribution from partnerships, estates, trusts, and corporations 

(A) From partnerships and estates 
Stock owned, directly or indirectly, by or for a partnership or estate shall be considered as owned proportionately by its partners or beneficiaries.
(B) From trusts 

(i) Stock owned, directly or indirectly, by or for a trust (other than an employees trust described in section 401 (a) which is exempt from tax under section 501 (a)) shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries in such trust.
(ii) Stock owned, directly or indirectly, by or for any portion of a trust of which a person is considered the owner under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners) shall be considered as owned by such person.
(C) From corporations 
If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation.
(3) Attribution to partnerships, estates, trusts, and corporations 

(A) To partnerships and estates 
Stock owned, directly or indirectly, by or for a partner or a beneficiary of an estate shall be considered as owned by the partnership or estate.
(B) To trusts 

(i) Stock owned, directly or indirectly, by or for a beneficiary of a trust (other than an employees trust described in section 401 (a) which is exempt from tax under section 501 (a)) shall be considered as owned by the trust, unless such beneficiarys interest in the trust is a remote contingent interest. For purposes of this clause, a contingent interest of a beneficiary in a trust shall be considered remote if, under the maximum exercise of discretion by the trustee in favor of such beneficiary, the value of such interest, computed actuarially, is 5 percent or less of the value of the trust property.
(ii) Stock owned, directly or indirectly, by or for a person who is considered the owner of any portion of a trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners), shall be considered as owned by the trust.
(C) To corporations 
If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such corporation shall be considered as owning the stock owned, directly or indirectly, by or for such person.
(4) Options 
If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.
(5) Operating rules 

(A) In general 
Except as provided in subparagraphs (B) and (C), stock constructively owned by a person by reason of the application of paragraph (1), (2), (3), or (4), shall, for purposes of applying paragraphs (1), (2), (3), and (4), be considered as actually owned by such person.
(B) Members of family 
Stock constructively owned by an individual by reason of the application of paragraph (1) shall not be considered as owned by him for purposes of again applying paragraph (1) in order to make another the constructive owner of such stock.
(C) Partnerships, estates, trusts, and corporations 
Stock constructively owned by a partnership, estate, trust, or corporation by reason of the application of paragraph (3) shall not be considered as owned by it for purposes of applying paragraph (2) in order to make another the constructive owner of such stock.
(D) Option rule in lieu of family rule 
For purposes of this paragraph, if stock may be considered as owned by an individual under paragraph (1) or (4), it shall be considered as owned by him under paragraph (4).
(E) S corporation treated as partnership 
For purposes of this subsection
(i) an S corporation shall be treated as a partnership, and
(ii) any shareholder of the S corporation shall be treated as a partner of such partnership.

The preceding sentence shall not apply for purposes of determining whether stock in the S corporation is constructively owned by any person.

(b) Cross references 
For provisions to which the rules contained in subsection (a) apply, see
(1) section 302 (relating to redemption of stock);
(2) section 304 (relating to redemption by related corporations);
(3) section 306 (b)(1)(A) (relating to disposition of section 306 stock);
(4) section 338 (h)(3) (defining purchase);
(5) section 382(l)(3) (relating to special limitations on net operating loss carryovers);
(6) section 856 (d) (relating to definition of rents from real property in the case of real estate investment trusts);
(7) section 958 (b) (relating to constructive ownership rules with respect to controlled foreign corporations); and
(8) section 6038 (e)(2) (relating to information with respect to certain foreign corporations).