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TITLE 26-INTERNAL REVENUE CODE (5) Distributions of convertible preferred stock If the distribution is of convertible pre- ferred stock, unless it is established to the satisfaction of the Secretary that such distri- bution 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 redemp- tion price and issue price, a redemption which is treated as a distribution to which section 301 applies, or any transaction (including a recapi- talization) having a similar effect on the inter- est of any shareholder shall be treated as a dis- tribution with respect to any shareholder whose proportionate interest in the earnings and profits or assets of the corporation is in- creased by such change, difference, redemption, or similar transaction. (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) 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). (Aug. 16, 1954, ch. 736, 68A Stat. 90; Dec. 30, 1969, Pub. L. 91-172, title IV, § 421(a), 83 Stat. 614; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (b)(5), (c). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1969-Subsec. (a). Pub. L. 91-172 substituted refer- ence to this section, for reference to subsec. (b), and omitted reference to rights to acquire its stock. Subsec. (b). Pub. L. 91-172 omitted reference to rights to acquire its stock, in the material preceding par. (1). redesignated former par. (2) as par. (1) and added pars. (2) to (5). Former par, (1) providing for the extent to which distribution of preference divi- dends were to be treated as distribution of property to which section 301 applied, was stricken. Subsec. (c). Pub. L. 91-172 added subsee. (c). Former subsec. (c) was redesignated as subsec. (e). Subsec. (d). Pub. L. 91-172 added subsec. (d). Subsec. (e). Pub. L. 91-172 redesignated former subsec. (c) as (e). EFFECTIvE DATE OF 1969 AMENDMENT Section 421(b) of Pub. L. 91-172 provided that: "(1) Except as otherwise provided in this subsection, the amendment made by subsection (a) [amending this section] shall apply with respect to distributions (or deemed distributions) made after January 10, 1969, in taxable years ending after such date. "C2)(A) Section 305(b)(2) of the Internal Revenue Code of 1954 (as added by subsection (a)) [subsec. (b)(2) of this section] shall not apply to a distribution (or deemed distribution) of stock made before January 1, 1991, with respect to stock (i) outstanding on Janu- ary 10, 1969, 0i) issued pursuant to a contract binding on January 10, 1969, on the distributing corporation, (ill) which is additional stock of that class of stock which (as of January 10, 1969) had the largest fair market value of all classes of stock of the corporation (taking into account only stock outstanding on Janu- ary 10, 1969, or issued pursuant to a contract binding on January 10, 1969), (iv) described in subparagraph (C)(iii), or Cv) issued in a prior distribution described in clause Ci), (i), (ii), or (iv). "(B) Subparagraph (A) shall apply only if- "(i) the stock as to which there is a receipt of prop- erty was outstanding on January 10, 1969 (or was Issued pursuant to a contract binding on January 10, 1969, on the distributing corporation), and "(i) if such stock and any stock described in sub- paragraph (A)Ci) were also outstanding on January 10, 1968, a distribution of property was made on or before January 10, 1969, with respect to such stock, and a distribution of stock was made on or before January 10, 1969, with respect to such stock de- scribed in subparagraph (AM(i). "(C) Subparagraph CA) shall cease to apply when at any time after October 9, 1969, the distributing corpo- ration issues any of its stock (other than in a distribu- tion of stock with respect to stock of the same class) which is not- "(i) nonconvertible preferred stock. "ii) additional stock of that clasLs of stock which meets the requirements of subparagraph (A)(iii), or "Cill) preferred stock which is convertible into stock which meets the requi'ements of subpara- graph (A(iii) at a fixed conversion ratio which takes account of all stock dividends and stock splits with respect to the stock into which such convertible stock is convertible. "(D) For purposes of this paragraph, the term 'stock' includes rights to acquire such stock. "(3) In cases to which Treasury Decision 6990 (pro- mulgated January 10, 1969) would not have applied, in applying paragraphs (1) and (2) April 22, 1969, shall be substituted for January 10, 1969. "(4) Section 305(b)(4) of the Internal Revenue Code of 1954 (as added by subsection Ca)) [subsec. (b)(4) of this section] shall not apply to any distribution (or deemed distribution) with respect to preferred stock (including any increase in the conversion ratio of con- vertible stock) made before January 1, 1991, pursuant to the terms relating to the issuance of such stock which were in effect on January 10, 1969. "(5) With respect to distributions made or consid- ered as made after January 10, 1969, in taxable years ending after such date, to the extent that the amend- ment made by subsection (a) [amending this section] does not apply by reason of paragraph (2), (3), or (4) of this subsection, section 305 of the Internal Revenue Code of 1954 (this section] (as in effect before the amendment made by subsection Ca)) shall continue to apply." CROSS REFERENCES Basis of stock and stock rights acquired in a distribu- tion to which this section applies, see section 307 of this title. Definition of "section 306 stock" as including stock distributions not includible as gross income by reason of this section, see section 306 of this title. Earnings and profits, distributions not subject to tax by reason of this section, see section 312 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 306, 307, 312, 425, 1101 of this title. § 306. Dispositions of certain stock (a) General rule If a shareholder sells or otherwise disposes of section 306 stock (as defined in subsection (c))- § 306 Page 236