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TITLE 26-INTERNAL REVENUE CODE (except as provided in paragraph (2)) the common stock so received shall not be treated as section 306 stock; and (2) common stock with respect to which there is a privilege of converting into stock other than common stock (or into property), whether or not the conversion privilege is contained in such stock, shall not be treated as common stock. (f) Source of gain The amount treated under subsection (a)(1)(A) as ordinary income shall, for purposes of part I of subchapter N (sec. 861 and follow. ing, relating to determination 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 as a dividend at the time of the distribution of such stock. If under the preceding sentence such amount is determined to be derived from sources within the United States, such amount shall be considered to be fixed or determinable annual or periodical gains, profits, and income within the meaning of section 871(a) or section 881(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, then, for purposes of this section- (1) the fair market value of such stock 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's ratable share of the amount which would have been a dividend if money had been distributed in lieu of stock 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) shall not apply unless the stock meets the requirements of such sub- section both at the time of such distribution and at the time of such change. (h) Stock received in distributions and reorganiza. tions to which 1939 Code applied If stock- (1) was received in a distribution or reorga- nization to which the Internal Revenue Code of 1939 (or the corresponding provisions of prior law) applied, (2) such stock would have been section 306 stock if this Code applied to such distribution or reorganization, and (3) such stock is disposed of or redeemed on or after June 22, 1954, then the foregoing subsections of this section shall not apply in respect of such disposition or redemption. The extent to which such disposi- tion or redemption shall be treated as a divi- dend shall be determined as if the Internal Revenue Code of 1939 (as modified by the pro- visions of this Code other than the foregoing subsections of this section) continued to apply in respect of such disposition or redemption. (Aug. 16, 1954, ch. 736, 68A Stat. 90; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(b)(3)(J), 1906(b)(13)(A), 90 Stat. 1793, 1834.) REFERENCES IN TEXT The Internal Revenue Code of 1939, referred to in subsec, (h), is act Feb. 10, 1939, ch. 2, 53 Stat. 1, as amended. Prior to the enactment of the Internal Rev- enue Code of 1954, the 1939 Code was classified to former Title 26, Internal Revenue Code. For table of comparisons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. AMENDMENTS 1976-Subsec. (a)(1)(A). 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. (a)(1)(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" following "Secretary". Subsec. (M. Pub. L. 94-455, § 1901(b)(3)(J), substitut- ed "ordinary income" for "gain from the sale of prop- erty which is not a capital asset". EFFEcTxvE DATE OF 1976 AMENDMENT Amendment of subsecs. (a)(l)(A), (B), (f) 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 an Effective Date of 1976 Amendment note under section 2 of this title. CROSS REFERENCES Constructive ownership of stock, see section 318 of this title. Distributions in redemption of stack, see section 302 of this title. Effective date, section 303 shall apply only with re- spect to dispositions (or redemptions) occurring on or after June 22, 1954, see section 391 of this title. Receipt of additional consideration, exchanges for section 306 stock, see section 356 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in secl.ions 302, 318, 356 of this title. § 307. Basis of stock and stock rights acquired in dis. tributions (a) General rule If a shareholder in a corporation receives its stock or rights to acquire its stock (referred to in this subsection as "new stock") in a distribu- tion to which section 305(a) applies, then the basis of such new stock and of the stock with respect to which it is distributed (referred to in this section as "old stock"), respectively, shall, in the shareholder's hands, be determined by allocating between the old stock and the new stock the adjusted basis of the old stock. Such allocation shall be made under regulations pre- scribed by the Secretary. (b) Exception for certain stock rights (1) In general If- (A) a corporation distributes rights to ac- quire its stock to a shareholder in a distri- bution to which section 305(a) applies, and (B) the fair market value of such rights at the time of the distribution is less than 15 percent of the fair market value of the old stock at such time, then subsection (a) shall not apply and the basis of such rights shall be zero, unless the taxpayer elects under paragraph (2) of this subsection to determine the basis of the old Page 238 § 307