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TITLE 26-INTERNAL REVENUE CODE (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 stock's ratable share of the amount which would have been a divi- dend 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 subpara- graph (A) as ordinary income, plus (i) the adjusted basis of the stock, shall be treated as gain from the sale of such stock. (C) No loss shall be recognized. (2) Redemption If the disposition is a redemption, the amount realized shall be treated as a distribu- tion of property to which section 301 applies. (b) Exceptions Subsection (a) shall not apply- (1) Termination of shareholder's interest (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 attribut- able 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 sec- tion 302(b)(3) applies. (2) Liquidations If the section 306 stock is redeemed in a dis- tribution in partial or complete liquidation to which part II (see. 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 disposi- tion 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 sec- tion 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- (1) which was received, by the share- holder selling or otherwise disposing of such stock, in pursuance of a plan of reor- ganization (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 (if) 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 divi- dend, or the stock was received in ex- change 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 subpara- graph (B), stock the basis of which (in the hands of the shareholder selling or other- wise 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 "sec- tion 306 stock" does not include any stock no part of the distribution of which would have been a dividend at the time of the distribu- tion if money had been distributed in lieu of the stock. (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 distrib- uted 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 distri- bution. (e) Convertible stock For purposes of subsection (c)- (1) if section 306 stock was issued with re- spect 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 privi- lege contained in the section 306 stock), then Page 237