---
kind: "section"
citation: "26 U.S.C. § 306"
title: "26"
title_heading: "Internal Revenue Code"
number: "306"
heading: "Dispositions of certain stock"
release: "119-102"
url: "https://uscodex.org/usc/26/306"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 1 — Normal Taxes and Surtaxes"
  - "Subchapter C — Corporate Distributions and Adjustments"
  - "Part I — Distributions by Corporations"
  - "Subpart A — Effects on Recipients"
---

# §306. Dispositions of certain stock

- (a) **General rule—** If a [shareholder](/usc/26/543.md?p=a-4) sells or otherwise disposes of section 306 stock (as defined in [subsection (c)](#c))—
  - (1) **Dispositions other than redemptions—** If such disposition is not a redemption (within the meaning of [section 317(b)](/usc/26/317.md?p=b))—
    - (A) The amount realized shall be treated as [ordinary income](/usc/26/64.md). This subparagraph shall not apply to the extent that—
      - (i) the amount realized, exceeds
      - (ii) such [stock](/usc/26/7701.md?p=a-7)’s ratable share of the amount which would have been a [dividend](/usc/26/316.md?p=b-2-A) at the time of distribution if (in lieu of section 306 stock) the [corporation](/usc/26/7701.md?p=a-3) had distributed money in an amount equal to the fair market value of the [stock](/usc/26/7701.md?p=a-7) at the time of distribution.
    - (B) Any excess of the amount realized over the sum of—
      - (i) the amount treated under [subparagraph (A)](#a-1-A) as [ordinary income](/usc/26/64.md), plus
      - (ii) the adjusted basis of the [stock](/usc/26/7701.md?p=a-7),

      shall be treated as gain from the sale of such [stock](/usc/26/7701.md?p=a-7).

    - (C) No loss shall be recognized.
    - (D) **Treatment as dividend.—** For purposes of [section 1(h)(11)](/usc/26/1.md?p=h-11) and such other provisions as the [Secretary](/usc/26/7701.md?p=a-11-B) may specify, any amount treated as [ordinary income](/usc/26/64.md) under this paragraph shall be treated as a [dividend](/usc/26/316.md?p=b-2-A) received from the [corporation](/usc/26/7701.md?p=a-3).
  - (2) **Redemption—** If the disposition is a redemption, the amount realized shall be treated as a [distribution of property](/usc/26/316.md?p=b-2-B) to which [section 301](/usc/26/301.md) applies.
- (b) **Exceptions—** [Subsection (a)](#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](/usc/26/7701.md?p=a-1) the ownership of whose [stock](/usc/26/7701.md?p=a-7) would (under [section 318(a)](/usc/26/318.md?p=a)) be attributable to the [shareholder](/usc/26/543.md?p=a-4); and
      - (iii) terminates the entire [stock](/usc/26/7701.md?p=a-7) [interest](/usc/26/856.md?p=f-1) of the [shareholder](/usc/26/543.md?p=a-4) in the [corporation](/usc/26/7701.md?p=a-3) (and for purposes of this clause, [section 318(a)](/usc/26/318.md?p=a) shall apply).
    - (B) **In redemption—** If the disposition is a redemption and paragraph [(3)](/usc/26/302.md?p=b-3) or [(4)](/usc/26/302.md?p=b-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](/usc/26/331.md) 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](/usc/26/543.md?p=a-4) 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](/usc/26/7701.md?p=a-11-B)—
    - (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](/usc/26/7701.md?p=a-7) 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](/usc/26/7701.md?p=a-7) which meets the requirements of subparagraph (A), (B), or (C) of this paragraph.
    - (A) **Distributed to seller—** [Stock](/usc/26/7701.md?p=a-7) (other than common [stock](/usc/26/7701.md?p=a-7) issued with respect to common [stock](/usc/26/7701.md?p=a-7)) which was distributed to the [shareholder](/usc/26/543.md?p=a-4) selling or otherwise disposing of such [stock](/usc/26/7701.md?p=a-7) if, by reason of [section 305(a)](/usc/26/305.md?p=a), any part of such distribution was not includible in the gross income of the [shareholder](/usc/26/543.md?p=a-4).
    - (B) **Received in a corporate reorganization or separation—** [Stock](/usc/26/7701.md?p=a-7) which is not common [stock](/usc/26/7701.md?p=a-7) and—
      - (i) which was received, by the [shareholder](/usc/26/543.md?p=a-4) selling or otherwise disposing of such [stock](/usc/26/7701.md?p=a-7), in pursuance of a plan of reorganization (within the meaning of [section 368(a)](/usc/26/368.md?p=a)), or in a distribution or exchange to which [section 355](/usc/26/355.md) (or so much of [section 356](/usc/26/356.md) as relates to [section 355](/usc/26/355.md)) applied, and
      - (ii) with respect to the receipt of which gain or loss to the [shareholder](/usc/26/543.md?p=a-4) 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](/usc/26/7701.md?p=a-7) [dividend](/usc/26/316.md?p=b-2-A), or the [stock](/usc/26/7701.md?p=a-7) was received in exchange for section 306 stock.

      For purposes of this section, a receipt of [stock](/usc/26/7701.md?p=a-7) to which the foregoing provisions of this subparagraph apply shall be treated as a distribution of [stock](/usc/26/7701.md?p=a-7).

    - (C) **Stock having transferred or substituted basis—** Except as otherwise provided in [subparagraph (B)](#c-1-B), [stock](/usc/26/7701.md?p=a-7) the basis of which (in the hands of the [shareholder](/usc/26/543.md?p=a-4) selling or otherwise disposing of such [stock](/usc/26/7701.md?p=a-7)) is determined by reference to the basis (in the hands of such [shareholder](/usc/26/543.md?p=a-4) or any other [person](/usc/26/7701.md?p=a-1)) 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](/usc/26/7701.md?p=a-7) no part of the distribution of which would have been a [dividend](/usc/26/316.md?p=b-2-A) at the time of the distribution if money had been distributed in lieu of the [stock](/usc/26/7701.md?p=a-7).
  - (3) **Certain stock acquired in section 351 exchange—** The term “section 306 stock” also [includes](/usc/26/7701.md?p=c) any [stock](/usc/26/7701.md?p=a-7) which is not common [stock](/usc/26/7701.md?p=a-7) acquired in an exchange to which [section 351](/usc/26/351.md) applied if receipt of money (in lieu of the [stock](/usc/26/7701.md?p=a-7)) would have been treated as a [dividend](/usc/26/316.md?p=b-2-A) to any extent. Rules similar to the rules of [section 304(b)(2)](/usc/26/304.md?p=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](/usc/26/7701.md?p=a-7) 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)](#c-1-B-ii) and [(3)](#c-3), [section 318(a)](/usc/26/318.md?p=a) shall apply. For purposes of applying the preceding sentence to [paragraph (3)](#c-3), the rules of [section 304(c)(3)(B)](/usc/26/304.md?p=c-3-B) shall apply.
- (d) **Stock rights—** For purposes of this section—
  - (1) [stock](/usc/26/7701.md?p=a-7) rights shall be treated as [stock](/usc/26/7701.md?p=a-7), and
  - (2) [stock](/usc/26/7701.md?p=a-7) acquired through the exercise of [stock](/usc/26/7701.md?p=a-7) rights shall be treated as [stock](/usc/26/7701.md?p=a-7) distributed at the time of the distribution of the [stock](/usc/26/7701.md?p=a-7) 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)](#c)—
  - (1) if section 306 stock was issued with respect to common [stock](/usc/26/7701.md?p=a-7) and later such section 306 stock is exchanged for common [stock](/usc/26/7701.md?p=a-7) in the same [corporation](/usc/26/7701.md?p=a-3) (whether or not such exchange is pursuant to a conversion privilege contained in the section 306 stock), then (except as provided in [paragraph (2)](#e-2)) the common [stock](/usc/26/7701.md?p=a-7) so received shall not be treated as section 306 stock; and
  - (2) common [stock](/usc/26/7701.md?p=a-7) with respect to which there is a privilege of converting into [stock](/usc/26/7701.md?p=a-7) other than common [stock](/usc/26/7701.md?p=a-7) (or into [property](/usc/26/317.md?p=a)), whether or not the conversion privilege is contained in such [stock](/usc/26/7701.md?p=a-7), shall not be treated as common [stock](/usc/26/7701.md?p=a-7).
- (f) **Source of gain—** The amount treated under [subsection (a)(1)(A)](#a-1-A) as [ordinary income](/usc/26/64.md) shall, for purposes of part I of subchapter N ([sec. 861](/usc/26/861.md) and following, relating to [determination](/usc/26/1377.md?p=b-2) 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](/usc/26/7701.md?p=a-3) as a [dividend](/usc/26/316.md?p=b-2-A) at the time of the distribution of such [stock](/usc/26/7701.md?p=a-7). If under the preceding sentence such amount is determined to be derived from sources within the [United States](/usc/26/638.md?p=1), such amount shall be considered to be fixed or determinable annual or periodical gains, profits, and income within the meaning of [section 871(a)](/usc/26/871.md?p=a) or [section 881(a)](/usc/26/881.md?p=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](/usc/26/7701.md?p=a-7), then, for purposes of this section—
  - (1) the fair market value of such [stock](/usc/26/7701.md?p=a-7) 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 [stock](/usc/26/7701.md?p=a-7)’s ratable share of the amount which would have been a [dividend](/usc/26/316.md?p=b-2-A) if money had been distributed in lieu of [stock](/usc/26/7701.md?p=a-7) 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)](#c-2) shall not apply unless the [stock](/usc/26/7701.md?p=a-7) meets the requirements of such subsection both at the time of such distribution and at the time of such change.

## Source credit

(Aug. 16, 1954, ch. 736, 68A Stat. 90; Pub. L. 94–455, title XIX, §§ 1901(b)(3)(J), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1793, 1834; Pub. L. 95–600, title VII, § 702(a)(1), (2), Nov. 6, 1978, 92 Stat. 2925; Pub. L. 96–223, title IV, § 401(a), Apr. 2, 1980, 94 Stat. 299; Pub. L. 97–248, title II, §§ 222(e)(1)(A), (2), 226(b), 227(a), Sept. 3, 1982, 96 Stat. 480, 492; Pub. L. 98–369, div. A, title VII, § 712(i)(2), (l)(5)(B), (6), July 18, 1984, 98 Stat. 948, 954; Pub. L. 101–508, title XI, § 11801(a)(18), Nov. 5, 1990, 104 Stat. 1388–521; Pub. L. 108–27, title III, § 302(e)(3), May 28, 2003, 117 Stat. 763.)

## Notes

### Editorial Notes

### Amendments

2003—Subsec. (a)(1)(D). Pub. L. 108–27 added subpar. (D).

1990—Subsec. (h). Pub. L. 101–508 struck out subsec. (h) which related to stock received in distributions and reorganizations to which 1939 Code applied.

1984—Subsec. (b)(1). Pub. L. 98–369, § 712(i)(2), substituted “interest, etc.” for “interest” in heading.

Subsec. (c)(3). Pub. L. 98–369, § 712(l)(6), incorporated existing second sentence in provision designated subpar. (A) and added subpar. (B).

Subsec. (c)(4). Pub. L. 98–369, § 712(l)(5)(B), substituted “the rules of section 304(c)(3)(B) shall apply” for “sections 318(a)(2)(C) and 318(a)(3)(C) shall be applied without regard to the 50 percent limitation contained therein”.

1982—Subsec. (b)(1)(B). Pub. L. 97–248, § 222(e)(2), substituted “paragraph (3) or (4) of section 302(b)” for “section 302(b)(3)”.

Subsec. (b)(2). Pub. L. 97–248, § 222(e)(1)(A), struck out “partial or” before “complete liquidation”.

Subsec. (c)(3). Pub. L. 97–248, § 226(b), added par. (3).

Subsec. (c)(4). Pub. L. 97–248, § 227(a), added par. (4).

1980—Subsecs. (a)(3), (b)(5). Pub. L. 96–223 repealed the amendments made by Pub. L. 95–600, § 702(a)(1), (2). See 1978 Amendment notes below.

1978—Subsec. (a)(3). Pub. L. 95–600, § 702(a)(1), added par. (3) which related to ordinary income from the sale or redemption of section 306 stock which was carryover basis property adjusted for 1976 value. See Repeals note below.

Subsec. (b)(5). Pub. L. 95–600, § 702(a)(2), added par. (5) which provided that subsec. (a) of this section shall not apply to the extent that section 303 applies to a distribution in redemption of section 306 stock. See Repeals note below.

1976—Subsec. (a)(1)(A), (B)(i). Pub. L. 94–455, § 1901(b)(3)(J), substituted “ordinary income” for “gain from the sale of property which is not a capital asset”.

Subsec. (b)(4). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.

Subsec. (f). Pub. L. 94–455, § 1901(b)(3)(J), substituted “ordinary income” for “gain from the sale of property which is not a capital asset”.

### Statutory Notes and Related Subsidiaries

### Effective Date of 2003 Amendment

Amendment by Pub. L. 108–27 applicable, except as otherwise provided, to taxable years beginning after Dec. 31, 2002, see section 302(f) of Pub. L. 108–27, set out as an Effective and Termination Dates of 2003 Amendment note under section 1 of this title.

### Effective Date of 1984 Amendment

Amendment by Pub. L. 98–369 effective as if included in the provision of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97–248, to which such amendment relates, see section 715 of Pub. L. 98–369, set out as a note under section 31 of this title.

### Effective Date of 1982 Amendment

Amendment by section 222(e)(1)(A), (2) of Pub. L. 97–248 applicable to distributions after Aug. 31, 1982, with exceptions for certain partial liquidations, see section 222(f) of Pub. L. 97–248, set out as a note under section 302 of this title.

Amendment by section 226(b) of Pub. L. 97–248 applicable to transfers occurring after Aug. 31, 1982, except for certain transfers pursuant to an application to form a BHC filed with the Federal Reserve Board before Aug. 16, 1982, see section 226(c) of Pub. L. 97–248, set out as a note under section 304 of this title.

Pub. L. 97–248, title II, § 227(c)(1), Sept. 3, 1982, 96 Stat. 492, provided that: “The amendment made by subsection (a) [amending this section] shall apply to stock received after August 31, 1982, in taxable years ending after such date.”

### Effective Date of 1980 Amendment and Revival of Prior Law

Amendment by Pub. L. 96–223 (repealing section 702(a)(1), (2) of Pub. L. 95–600 and the amendments made thereby, which had amended this section) applicable in respect of decedents dying after Dec. 31, 1976, and, except for certain elections, this title to be applied and administered as if those repealed provisions had not been enacted, see section 401(b), (e) of Pub. L. 96–223, set out as a note under section 1023 of this title.

### Effective Date of 1978 Amendment

Pub. L. 95–600, title VII, § 702(a)(3), Nov. 6, 1978, 92 Stat. 2925, provided that the amendments made by section 702(a) of Pub. L. 95–600 would apply to the estates of decedents dying after Dec. 31, 1979, prior to repeal by Pub. L. 96–223, title IV, § 401(a), Apr. 2, 1980, 94 Stat. 299.

### Effective Date of 1976 Amendment

Amendment by section 1901(b)(3)(J) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title.

### Repeals

Pub. L. 95–600, § 702(a)(1), (2), cited as a credit to this section, and the amendments made thereby, were repealed by Pub. L. 96–223, title IV, § 401(a), Apr. 2, 1980, 94 Stat. 299, resulting in the text of this section reading as it read prior to enactment of section 702(a)(1), (2). See Effective Date of 1980 Amendment and Revival of Prior Law note above.

### Savings Provision

For provisions that nothing in amendment by 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 45K of this title.