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TITLE 26-INTERNAL REVENUE CODE paragraph, amounts returned to a taxpayer with respect to a distribution shall be first ap- plied to the return of amounts which, withcut regard to this paragraph, would have been treated as distributed out of the policyholders surplus account. This paragraph shall not apply if, at the time such distribution was made, the taxpayer intended to avail itself of the provisions of this paragraph by having its shareholders return all or a part of such dis- tribution. Nothing in this paragraph shall affect the tax treatment of the receipt of the distribution by any shareholder, and the basis to a shareholder of his stock in the taxpayer shall not be Increased by reason of amounts returned under this paragraph to the extent that a dividends received deduction or exclu- sion was allowable in respect of the distribu- tion of such amount under any provision of this title. (e) Special rule for certain mutualizations (i) In general For purposes of this section and section 802(b)(3), any distribution to shareholders after December 31, 1958, in acquisition of stock pursuant to a plan of mutualization shall be treated- (A) first, as made out of paid-in capital and paid-in surplus, to the extent thereof, (B) thereafter, as made in two allocable parts- (I) one part of which is made out of the other accounts referred to in subsection (a)(3), and (ii) the remainder of which is a distribu- tion to which subsection (a) applies. (2) Special rules (A) Allocation ratio The part referred to in paragraph (1)(B)(i) is the amount which bears the same ratio to the amount to which para- graph (1)(B) applies as- (i) the excess (determined as of Decem- ber 31, 1958, and adjusted to the begin- ning of the year of the distribution as pro- vided in subparagraph (B)) of the assets over the total liabilities, bears to (ii) the sum (determined as of the begin- ning of the year of the distribution) of the excess described in clause (I), the amount in the shareholders surplus ac- count, plus the amount in the policy- holders surplus account. (B) Adjustment for certain distributions The excess described in subparagraph (A)(i) shall be reduced by the aggregate of the prior distributions which have been treated under subsection (a)(3) as made out of accounts other than the shareholders surplus account and the policyholders sur- plus account. (f) Distribution defined For purposes of this section, the term "distri- bution" includes any distribution in redemption of stock or in partial or complete liquidation of the corporation, but does not include- (1) any distribution made by the corpora- tion in its stock or in rights to acquire its stock* (2) except for purposes of subsection (a)(3) and subsection (e)(2)(B), any distribution in redemption of stock issued before 1958 which at all times on and after the date of issuance and on and before the date of redemnption is limited as to dividends and is callable, at the option of the issuer, at a price not in excess of 105 percent of the sum of the issue price and the amount of any contribution to surplus made by the original purchaser at the time of his purchase; (3) any distribution after December 31, 1963, of the stock of a controlled corporation to which section 355 applies, if such con- trolled corporation is an insurance company subject to the tax imposed by section 831 and if- (A) control was acquired prior to January 1, 1958, or (B) control has been acquired after De- cember 31, 1957- (i) in a transaction qualifying as a reor- ganization under section 368(a)(1)(B), if the distributing corporation has at all times since December 31, 1957, owned stock representing not less than 50 per- cent of the total combined voting power of all classes of stock entitled to vote, and not less than 50 percent of the value of all classes of stock, of the controlled corpora- tion, or (ii) solely in exchange for stock of the distributing corporation which stock is immediately exchanged by the controlled corporation in a transaction qualifying as a reorganization under section 368(a)(1) (A) or (C), if the controlled corporation has at all times since its organization been wholly owned by the distributing corpora- tion and the distributing corporation has at all times since December 31, 1957, owned stock representing not less than 50 percent of the total combined voting power of all classes of stock entitled to vote, and not less than 50 percent of the value of all classes of stock, of the corpo- ration the assets of which have been transferred to the controlled corporation in the section 368(a)(1)(A) or (C) reorgani- zation; (4) any distribution after December 31, 1966, of the stock of a controlled corporation to which section 355 applies, if such distribu- tion is made to a corporation which immedi- ately after the distribution is in control (within the meaning of section 368(c)) of both the distributing corporation and such con- trolled corporation and if such controlled cor- poration is a life insurance company of which the distributing corporation has been in con- trol at all times since December 31, 1957; or (5) any distribution after December 31, 1968, of the stock of a controlled corporation to which section 355 applies, if such distribu- tion is made to a corporation which immedi- ately after the distribution is the owner of all the stock of all classes of both the distribut- ing corporation and such controlled corpora- tion and if, immediately before the distribu- tion, the distributing corporation had been the owner of all of the stock of all classes of Page 511