26 USC 302 - Distributions in redemption of stock

U.S Code last checked for updates: May 18, 2024

§ 302.

Distributions in redemption of stock

(a)

General rule

(b)

Redemptions treated as exchanges

(1)

Redemptions not equivalent to dividends

(2)

Substantially disproportionate redemption of stock

(A)

In general

(B)

Limitation

(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 shareholder’s 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

(3)

Termination of shareholder’s interest

(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)

Redemptions by certain regulated investment companies

Except to the extent provided in regulations prescribed by the Secretary, subsection (a) shall apply to any distribution in redemption of stock of a publicly offered regulated investment company (within the meaning of section 67(c)(2)(B)) if—

(A)

such redemption is upon the demand of the stockholder, and

(B)

such company issues only stock which is redeemable upon the demand of the stockholder.

(6)

Application of paragraphs

(c)

Constructive ownership of stock

(1)

In general

(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

(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 corporation’s 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

(5)

Treatment of certain pass-thru entities

(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.

(Aug. 16, 1954, ch. 736, 68A Stat. 85; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 96–589, § 5(b), Dec. 24, 1980, 94 Stat. 3405; Pub. L. 97–248, title II, §§ 222(c), 228(a), Sept. 3, 1982, 96 Stat. 478, 493; Pub. L. 98–369, div. A, title VII, § 712(i)(1), July 18, 1984, 98 Stat. 948; Pub. L. 111–325, title III, § 306(a), Dec. 22, 2010, 124 Stat. 3549.)

cite as: 26 USC 302