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TITLE 26-INTERNAL REVENUE CODE corporation acquiring it, as a contribution to the capital of such corporation. (2) Acquisition by subsidiary For purposes of sections 302 and 303, if- (A) in return for property, one corpora- tion 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 dis- tribution in redemption of the stock of the is- suing 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 ex- change for the stock shall be made by refer- ence to the stock of the issuing corporation. In applying section 318(a) (relating to con- structive 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 limi- tation contained therein. (2) Amount constituting dividend (A) Where subsection (a)(1) applies In the case of any acquisition of stock to which paragraph (1) (and not paragraph (2)) of subsection (a) of this section applies, the determination of the amount which is a dividend shall be made solely by reference to the earnings and profits of the acquiring corporation. (B) Where subsection (a)(2) applies In the case of any acquisition of stock to which subsection (a)(2) of this section ap- plies, the determination of the amount which is a dividend shall be made as if the property were distributed by the acquiring corporation to the issuing corporation and immediately thereafter distributed by the issuing corporation. (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 per- cent 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) Constructive ownership Section 318(a) relating to the constructive ownership of stock) shall apply for purposes of determining control under paragraph (1). For purposes of the preceding sentence, sec- tions 318(a)(2)(C) and 318(a)(3)(C) shall be applied without regard to the 50 percent limi- tation contained therein. (Aug. 16, 1954, ch. 736, 68A Stat. 89; Aug. 31, 1964, Pub. L. 88-554, § 4(b)(1), 78 Stat. 763.) AMENDMENTS 1964-Subsec. (b)(1). Pub. L. 88-554 inserted the ref- erence to section 318(a)(3)(C) of this title. Subsec. (c)(2). Pub. L. 88-554 inserted the reference to section 318(a)(3)(C) of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by section 4 of Pub. L. 88-554 effective Aug. 31, 1964, except that for purposes of this section and section 302 of this title, such amendments shall not apply to distributions in payment for stock acqui- sitions or redemptions, if such acquisition or redemp- tion occurred before Aug. 31, 1964. see section 4(c) of Pub. L. 88-554 set out as an Effective Date of 1964 Amendment note under section 318 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 318, 368, 999, 6166, 6166A of this title. § 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 shireholders with respect to its stock. (b) Exceptions Subsection (a) shall not apply to a distribu- tion by a corporation of its stock, and the distri- bution 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), pay- able either- (A) in its stock, or (B) in property. (2) Disproportionate distributions If the distribution (or a series of distribu- tions of which such distribution is one) has the result of- (A) the receipt of property by some share- holders, and (B) an increase in the proportionate inter- ests 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 distribu- tions 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 pre- ferred stock, other than an increase in the conversion ratio of conve: tible preferred stock made solely to take aci ount of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible. Page 235 § 305