1. (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 shareholders with respect to its stock.

2. (b) Exceptions Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies—

   1. (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), payable either—

      1. (A) in its stock, or
      2. (B) in property.

   2. (2) Disproportionate distributions If the distribution (or a series of distributions of which such distribution is one) has the result of—

      1. (A) the receipt of property by some shareholders, and
      2. (B) an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation.

   3. (3) Distributions of common and preferred stock If the distribution (or a series of distributions of which such distribution is one) has the result of—

      1. (A) the receipt of preferred stock by some common shareholders, and
      2. (B) the receipt of common stock by other common shareholders.
   4. (4) Distributions on preferred stock If the distribution is with respect to preferred stock, other than an increase in the conversion ratio of convertible preferred stock made solely to take account of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible.
   5. (5) Distributions of convertible preferred stock If the distribution is of convertible preferred stock, unless it is established to the satisfaction of the Secretary that such distribution will not have the result described in paragraph (2).

3. (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 redemption price and issue price, a redemption which is treated as a distribution to which section 301 applies, or any transaction (including a recapitalization) having a similar effect on the interest of any shareholder shall be treated as a distribution with respect to any shareholder whose proportionate interest in the earnings and profits or assets of the corporation is increased by such change, difference, redemption, or similar transaction. Regulations prescribed under the preceding sentence shall provide that—

   1. (1) where the issuer of stock is required to redeem the stock at a specified time or the holder of stock has the option to require the issuer to redeem the stock, a redemption premium resulting from such requirement or option shall be treated as reasonable only if the amount of such premium does not exceed the amount determined under the principles of section 1273(a)(3),
   2. (2) a redemption premium shall not fail to be treated as a distribution (or series of distributions) merely because the stock is callable, and
   3. (3) in any case in which a redemption premium is treated as a distribution (or series of distributions), such premium shall be taken into account under principles similar to the principles of section 1272(a).

4. (d) Definitions

   1. (1) Rights to acquire stock For purposes of this section, the term “stock” includes rights to acquire such stock.
   2. (2) Shareholders For purposes of subsections (b) and (c), the term “shareholder” includes a holder of rights or of convertible securities.

5. (e) Treatment of purchaser of stripped preferred stock

   1. (1) In general If any person purchases after April 30, 1993, any stripped preferred stock, then such person, while holding such stock, shall include in gross income amounts equal to the amounts which would have been so includible if such stripped preferred stock were a bond issued on the purchase date and having original issue discount equal to the excess, if any, of—

      1. (A) the redemption price for such stock, over
      2. (B) the price at which such person purchased such stock.

      The preceding sentence shall also apply in the case of any person whose basis in such stock is determined by reference to the basis in the hands of such purchaser.

   2. (2) Basis adjustments Appropriate adjustments to basis shall be made for amounts includible in gross income under paragraph (1).
   3. (3) Tax treatment of person stripping stock If any person strips the rights to 1 or more dividends from any stock described in paragraph (5)(B) and after April 30, 1993, disposes of such dividend rights, for purposes of paragraph (1), such person shall be treated as having purchased the stripped preferred stock on the date of such disposition for a purchase price equal to such person’s adjusted basis in such stripped preferred stock.
   4. (4) Amounts treated as ordinary income Any amount included in gross income under paragraph (1) shall be treated as ordinary income.

   5. (5) Stripped preferred stock For purposes of this subsection—

      1. (A) In general The term “stripped preferred stock” means any stock described in subparagraph (B) if there has been a separation in ownership between such stock and any dividend on such stock which has not become payable.

      2. (B) Description of stock Stock is described in this subsection if such stock—

         1. (i) is limited and preferred as to dividends and does not participate in corporate growth to any significant extent, and
         2. (ii) has a fixed redemption price.

   6. (6) Purchase For purposes of this subsection, the term “purchase” means—

      1. (A) any acquisition of stock, where
      2. (B) the basis of such stock is not determined in whole or in part by the reference to the adjusted basis of such stock in the hands of the person from whom acquired.
   7. (7) Cross reference For treatment of stripped interests in certain accounts or entities holding preferred stock, see section 1286(e).

6. (f) Cross references For special rules—

   1. (1) Relating to the receipt of stock and stock rights in corporate organizations and reorganizations, see part III (sec. 351 and following).
   2. (2) In the case of a distribution which results in a gift, see section 2501 and following.
   3. (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; Pub. L. 91–172, title IV, § 421(a), Dec. 30, 1969, 83 Stat. 614; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 97–34, title III, § 321(a), (b), Aug. 13, 1981, 95 Stat. 287, 289; Pub. L. 97–448, title I, § 103(f), Jan. 12, 1983, 96 Stat. 2378; Pub. L. 101–508, title XI, §§ 11322(a), 11801(a)(17), (c)(7), Nov. 5, 1990, 104 Stat. 1388–463, 1388–521, 1388–524; Pub. L. 103–66, title XIII, § 13206(c)(1), Aug. 10, 1993, 107 Stat. 465; Pub. L. 108–357, title VIII, § 831(b), Oct. 22, 2004, 118 Stat. 1587; Pub. L. 115–141, div. U, title IV, § 401(c)(2)(D), Mar. 23, 2018, 132 Stat. 1206.)

Editorial Notes

Amendments

2018—Subsec. (e)(7). Pub. L. 115–141 substituted “1286(e)” for “1286(f)”.

2004—Subsec. (e)(7). Pub. L. 108–357 added par. (7).

1993—Subsecs. (e), (f). Pub. L. 103–66 added subsec. (e) and redesignated former subsec. (e) as (f).

1990—Subsec. (c). Pub. L. 101–508, § 11322(a), inserted sentence at end specifying the contents of regulations.

Subsec. (d)(1). Pub. L. 101–508, § 11801(c)(7)(A), struck out “(other than subsection (e))” after “this section”.

Subsecs. (e), (f). Pub. L. 101–508, § 11801(a)(17), (c)(7)(B), redesignated subsec. (f) as (e) and struck out former subsec. (e) relating to dividend reinvestment in stock of public utilities.

1983—Subsec. (e)(3)(A). Pub. L. 97–448, § 103(f)(1), substituted “placed in service qualified long-life public utility property having a cost equal to at least 60 percent of the aggregate cost of all tangible property described in subparagraph (A) or (B) of section 1245(a)(3) placed in service by the corporation during such period” for “acquired public utility recovery property having a cost equal to at least 60 percent of the aggregate cost of all tangible property described in section 1245(a)(3) (other than subparagraphs (C) and (D) thereof) acquired by the corporation during such period”.

Subsec. (e)(3)(C)(ii). Pub. L. 97–448, § 103(f)(2), substituted definition of “qualified long-life public utility property” for definition of “public utility recovery property” which had been defined as public utility property (within the meaning of section 167(l)(3)(A)) which was recovery property which was 10-year property or 15-year public utility property (within the meaning of section 168), except that any requirement that the property be placed in service after December 31, 1980, did not apply.

1981—Subsec. (d)(1). Pub. L. 97–34, § 321(b), inserted “(other than subsection (e))” after “this section”.

Subsecs. (e), (f). Pub. L. 97–34, § 321(a), added subsec. (e) and redesignated former subsec. (e) as (f).

1976—Subsecs. (b)(5), (c). Pub. L. 94–455 struck out “or his delegate” after “Secretary”.

1969—Subsec. (a). Pub. L. 91–172 substituted reference 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 text 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 dividends were to be treated as distribution of property to which section 301 applied, was struck out.

Subsecs. (c) to (e). Pub. L. 91–172 added subsecs. (c) and (d) and redesignated former subsec. (c) as (e).

Statutory Notes and Related Subsidiaries

Effective Date of 2018 Amendment

Pub. L. 115–141, div. U, title IV, § 401(c)(2)(E), Mar. 23, 2018, 132 Stat. 1206, provided that:

“The amendments made by this paragraph [amending this section and

section 1286 of this title] shall apply to bonds purchased on or after

July 2, 1982.”

Effective Date of 2004 Amendment

Pub. L. 108–357, title VIII, § 831(c), Oct. 22, 2004, 118 Stat. 1587, provided that:

“The amendments made by this section [amending this section and

section 1286 of this title] shall apply to purchases and dispositions after the date of the enactment of this Act [

Oct. 22, 2004].”

Effective Date of 1993 Amendment

Amendment by Pub. L. 103–66 effective Apr. 30, 1993, see section 13206(c)(3) of Pub. L. 103–66 set out as a note under section 167 of this title.

Effective Date of 1990 Amendment

Pub. L. 101–508, title XI, § 11322(b), Nov. 5, 1990, 104 Stat. 1388–464, provided that:

1. “(1) In general.— Except as provided in paragraph (2), the amendment made by subsection (a) [amending this section] shall apply to stock issued after October 9, 1990.

2. “(2) Exception.— The amendment made by subsection (a) shall not apply to any stock issued after October 9, 1990, if—

   1. “(A) such stock is issued pursuant to a written binding contract in effect on October 9, 1990, and at all times thereafter before such issuance,
   2. “(B) such stock is issued pursuant to a registration or offering statement filed on or before October 9, 1990, with a Federal or State agency regulating the offering or sale of securities and such stock is issued before the date 90 days after the date of such filing, or
   3. “(C) such stock is issued pursuant to a plan filed on or before October 9, 1990, in a title 11 or similar case (as defined in section 368(a)(3)(A) of the Internal Revenue Code of 1986).”

Effective Date of 1983 Amendment

Amendment by Pub. L. 97–448 effective, except as otherwise provided, as if it had been included in the provision of the Economic Recovery Tax Act of 1981, Pub. L. 97–34, to which such amendment relates, see section 109 of Pub. L. 97–448, set out as a note under section 1 of this title.

Effective Date of 1981 Amendment

Pub. L. 97–34, title III, § 321(c), Aug. 13, 1981, 95 Stat. 289, provided that:

“The amendments made by this section [amending this section] shall apply to distributions after

December 31, 1981, in taxable years ending after such date.”

Effective Date of 1969 Amendment

Pub. L. 91–172, title IV, § 421(b), Dec. 30, 1969, 83 Stat. 615, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that:

1. “(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.

2. “(2)

   1. (A) Section 305(b)(2) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by subsection (a)) shall not apply to a distribution (or deemed distribution) of stock made before January 1, 1991, with respect to stock (i) outstanding on January 10, 1969, (ii) issued pursuant to a contract binding on January 10, 1969, on the distributing corporation, (iii) 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 January 10, 1969, or issued pursuant to a contract binding on January 10, 1969), (iv) described in subparagraph (C)(iii), or (v) issued in a prior distribution described in clause (i), (ii), (iii), or (iv).

   2. “(B) Subparagraph (A) shall apply only if—

      1. “(i) the stock as to which there is a receipt of property was outstanding on January 10, 1969 (or was issued pursuant to a contract binding on January 10, 1969, on the distributing corporation), and
      2. “(ii) if such stock and any stock described in subparagraph (A)(i) 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 described in subparagraph (A)(i).

   3. “(C) Subparagraph (A) shall cease to apply when at any time after October 9, 1969, the distributing corporation issues any of its stock (other than in a distribution of stock with respect to stock of the same class) which is not—

      1. “(i) nonconvertible preferred stock.
      2. “(ii) additional stock of that class of stock which meets the requirements of subparagraph (A)(iii), or
      3. “(iii) preferred stock which is convertible into stock which meets the requirements of subparagraph (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.
   4. “(D) For purposes of this paragraph, the term ‘stock’ includes rights to acquire such stock.
3. “(3) In cases to which Treasury Decision 6990 (promulgated January 10, 1969) would not have applied, in applying paragraphs (1) and (2) April 22, 1969, shall be substituted for January 10, 1969.
4. “(4) Section 305(b)(4) of the Internal Revenue Code of 1986 (as added by subsection (a)) shall not apply to any distribution (or deemed distribution) with respect to preferred stock (including any increase in the conversion ratio of convertible 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. “(5) With respect to distributions made or considered as made after January 10, 1969, in taxable years ending after such date, to the extent that the amendment 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 1986 (as in effect before the amendment made by subsection (a)) shall continue to apply.”

Savings Provision

For provisions that nothing in amendment by section 11801(a)(17), (c)(7) of Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title.