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(B) the amount of any liability to which the property received by the shareholder is subject immediately before, and immediately after, the distribution.

(3) DETERMINATION OF FAIR MARKET VALUE.-For purposes of this section, fair market value shall be determined as of the date of the distribution.

(c) AMOUNT TAXABLE.-In the case of a distribution to which subsection (a) applies

(1) AMOUNT CONSTITUTING DIVIDEND.—That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income.

(2) AMOUNT APPLIED AGAINST BASIS.—That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock. (3) AMOUNT IN EXCESS OF BASIS.

(A) IN GENERAL.-Except as provided in subparagraph (B), that portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of property.

(B) DISTRIBUTIONS OUT OF INCREASE IN VALUE ACCRUED BEFORE MARCH 1, 1913.—That portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock and to the extent that it is out of increase in value ac

crued before March 1, 1913, shall be exempt from tax. (d) Basis.—The basis of property received in a distribution to which subsection (a) applies shall be

(1) NONCORPORATE DISTRIBUTEES.—If the shareholder is not a corporation, the fair market value of such property.

(2) CORPORATE DISTRIBUTEES.—If the shareholder is a corporation, whichever of the following is the lesser:

(A) the fair market value of such property; or

(B) the adjusted basis (in the hands of the distributing corporation immediately before the distribution) of such property, increased in the amount of gain to the distributing corporation

which is recognized under subsection (b) or (c) of section 311. (C) EXCEPTION FOR CERTAIN DISTRIBUTIONS BY

PERSONAL SERVICE CORPORATIONS.--Any distribution made by a corporation, which was classified as a personal service corporation under the provisions of the Revenue Act of 1918 or the Revenue Act of 1921, out of its earnings or profits which were taxable in accordance with the provisions of section 218 of the Revenue Act of 1918 (40 Stat. 1070), or section 218 of the Revenue Act of 1921 (42 Stat. 245), shall be exempt from tax to the distributees. (f) SPECIAL RULES.

(1) For distributions in redemption of stock, see section 302.

(2) For distributions in partial or complete liquidation, see part II (sec. 331 and following).

(3) For distributions in corporate organizations and reorganizations, see part III (sec. 351 and following).

(4) For partial exclusion from gross income of dividends received by individuals, see section 116.

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SEC. 302. DISTRIBUTIONS IN REDEMPTION OF STOCK.

(a) GENERAL RULE.—If a corporation redeems its stock (within the meaning of section 317 (b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock. (b) REDEMPTIONS TREATED AS EXCHANGES.

(1) REDEMPTIONS NOT EQUIVALENT TO DIVIDENDS.-Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend. (2) SUBSTANTIALLY DISPROPORTIONATE REDEMPTION OF STOCK.

(A) IN GENERAL. Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder.

(B) LIMITATION.--This paragraph shall not apply unless immediately after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote.

(C) DEFINITIONS.—For purposes of this paragraph, the distribution is substantially disproportionate if

(i) the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears

to all of the voting stock of the corporation at such time, is less than 80 percent of

(ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears

to all of the voting stock of the corporation at such time. For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholder's ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence. For purposes of the preceding sentence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value.

(D) SERIES OF REDEMPTIONS.--This paragraph shall not apply to any redemption made pursuant to a plan the purpose or effect of which is a series of redemptions resulting in a distribution which (in the aggregate) is not substantially disproportionate with respect to the shareholder.

(3) TERMINATION OF SHAREHOLDER'S INTEREST.-Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder. (4) STOCK ISSUED BY RAILROAD

IN CERTAIN REORGANIZATIONS.-Subsection (a) shall apply if the redemption is of stock issued by a railroad corporation (as defined in section 77 (m) of the Bankruptcy Act, as amended) pursuant to a plan of reorganization under section 77 of the Bankruptcy Act.

(5) APPLICATION OF PARAGRAPHS.-In determining whether a redemption meets the requirements of paragraph (1), the fact that such redemption fails to meet the requirements of paragraph (2), (3), or (4) shall not be taken into account. If a redemption meets the requirements of paragraph (3) and also the requirements of paragraph (1), (2), or (4), then so much of subsection (c) (2) as would (but for this sentence) apply in respect of the acquisition of

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CORPORATIONS

an interest in the corporation within the 10-year period beginning on the date of the distribution shall not apply. (c) CONSTRUCTIVE OWNERSHIP OF Stock.

(1) IN GENERAL.-Except as provided in paragraph (2) of this subsection, section 318 (a) shall apply in determining the ownership of stock for purposes of this section. (2) FOR DETERMINING TERMINATION OF INTEREST.

(A) In the case of a distribution described in subsection (b) (3), section 318 (a) (1) shall not apply if

(i) immediately after the distribution the distributee has no interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor,

(ii) the distributee does not acquire any such interest (other than stock acquired by bequest or inheritance) within 10 years from the date of such distribution, and

(iii) the distributee, at such time and in such manner as the Secretary or his delegate by regulations prescribes, files an agreement to notify the Secretary or his delegate of any acquisition described in clause (ii) and to retain such records

as may be necessary for the application of this paragraph. If the distributee acquires such an interest in the corporation (other than by bequest or inheritance) within 10 years from the date of the distribution, then the periods of limitation provided in sections 6501 and 6502 on the making of an assessment and the collection by levy or a proceeding in court shall, with respect to any deficiency (including interest and additions to the tax) resulting from such acquisition, include one year immediately following the date on which the distributee (in accordance with regulations prescribed by the Secretary or his delegate) notifies the Secretary or his delegate of such acquisition; and such assessment and collection may be made notwithstanding any provision of law or rule of law which otherwise would prevent such assessment and collection. (B) Subparagraph (A) of this paragraph shall not apply if

(i) any portion of the stock redeemed was acquired, directly or indirectly, within the 10-year period ending on the date of the distribution by the distributee from a person the ownership of whose stock would (at the time of distribution) be attributable to the distributee under section 318 (a), or

(ii) any person owns (at the time of the distribution) stock the ownership of which is attributable to the distributee under section 318 (a) and such person acquired any stock in the corporation, directly or indirectly, from the distributee within the 10-year period ending on the date of the distribution, unless such stock so acquired from the distributee is redeemed in the

same transaction. The preceding sentence shall not apply if the acquisition (or, in the case of clause (ii), the disposition) by the distributee did not have as one of its principal purposes the avoidance of Federal

income tax. (d) REDEMPTIONS TREATED AS DISTRIBUTIONS OF PROPERTY.Except as otherwise provided in this subchapter, if a corporation redeems its stock (within the meaning of section 317 (b)), and if sub

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section (a) of this section does not apply, such redemption shall be
treated as a distribution of property to which section 301 applies.
(e) CROSS REFERENCES.
For special rules relating to redemption-

(1) Death Taxes.—Of stock to pay death taxes, see section 303.
(2) Section 306 Stock.-Of section 306 stock, see section 306.

(3) Liquidations.-Of stock in partial or complete liquidation, see

section 331. SEC. 303. DISTRIBUTIONS IN REDEMPTION OF STOCK TO PAY DEATH

TAXES. (a) IN GENERAL.-A distribution of property to a shareholder by a corporation in redemption of part or all of the stock of such corporation which (for Federal estate tax purposes) is included in determining the gross estate of a decedent, to the extent that the amount of such distribution does not exceed the sum of

(1) the estate, inheritance, legacy, and succession taxes (including any interest collected as a part of such taxes) imposed because of such decedent's death, and

(2) the amount of funeral and administration expenses allowable as deductions to the estate under section 2053 (or under section 2106 in the case of the estate of a decedent nonresident, not a

citizen of the United States), shall be treated as a distribution in full payment in exchange for the stock so redeemed. (b) LIMITATIONS ON APPLICATION OF SUBSECTION (a).

(1) Period FOR DISTRIBUTION.–Subsection (a) shall apply only to amounts distributed after the death of the decedent and

(A) within the period of limitations provided in section 6501 (a) for the assessment of the Federal estate tax (determined without the application of any provision other than section 6501 (a)), or within 90 days after the expiration of such period, or

(B) if a petition for redetermination of a deficiency in such estate tax has been filed with the Tax Court within the time prescribed in section 6213, at any time before the expiration of 60 days after the decision of the Tax Court becomes final. (2) RELATIONSHIP OF STOCK TO DECEDENT'S ESTATE. —

(A) IN GENERAL. Subsection (a) shall apply to a distribution by a corporation only if the value (for Federal estate tax purposes) of all of the stock of such corporation which is included in determining the value of the decedent's gross estate is either

(i) more than 35 percent of the value of the gross estate of such decedent, or

(ii) more than 50 percent of the taxable estate of such decedent.

(B) SPECIAL RULE FOR STOCK OF TWO OR MORE CORPORATIONS. For purposes of the 35 percent and 50 percent requirements of subparagraph (A), stock of two or more corporations, with respect to each of which there is included in determining the value of the decedent's gross estate more than 75 percent in value of the outstanding stock, shall be treated as the stock of a single corporation. For the purpose of the 75 percent requirement of the preceding sentence, stock which, at the decedent's death, represents the surviving spouse's interest in property held by the

decedent and the surviving spouse as community property shall be treated as having been included in determining the value of

the decedent's gross estate. (c) Stock WITH SUBSTITUTED Basis.-If

(1) a shareholder owns stock of a corporation (referred to in this subsection as "new stock") the basis of which is determined by reference to the basis of stock of a corporation (referred to in this subsection as "old stock"),

(2) the old stock was included (for Federal estate tax purposes) in determining the gross estate of a decedent, and

(3) subsection (a) would apply to a distribution of property to such shareholder in redemption of the old stock, then, subject to the limitation specified in subsection (b) (1), subsection (a) shall apply in respect of a distribution in redemption of the new stock. SEC. 304. REDEMPTION THROUGH USE OF RELATED CORPORATIONS. (a) TREATMENT OF CERTAIN STOCK PURCHASES.

(1) ACQUISITION BY RELATED CORPORATION (OTHER THAN SUBSIDIARY). -For purposes of sections 302 and 303, if

(A) one or more persons are in control of each of two corporations, and

(B) in return for property, one of the corporations acquires stock in the other corporation from the person (or persons) so in

control, then (unless paragraph (2) applies) such property shall be treated as a distribution in redemption of the stock of the corporation acquiring such stock. In any such case, the stock so acquired shall be treated as having been transferred by the person from whom acquired, and as having been received by the corporation acquiring it, as a contribution to the capital of such corporation,

(2) ACQUISITION BY SUBSIDIARY.-For purposes of sections 302 and 303, if

(A) in return for property, one corporation acquires from a shareholder of another corporation stock in such other corporation, and

(B) the issuing corporation controls the acquiring corporation, then such property shall be treated as a distribution in redemption of the stock of the issuing corporation. (b) SPECIAL RULES FOR APPLICATION OF SUBSECTION (a).

(1) RULE FOR DETERMINATIONS UNDER SECTION 302 (b).-In the case of any acquisition of stock to which subsection (a) of this section applies, determinations as to whether the acquisition is, by reason of section 302 (b), to be treated as a distribution in part or full payment in exchange for the stock shall be made by reference to the stock of the issuing corporation. In applying section 318 (a) (relating to constructive ownership of stock) with respect to section 302 (b) for purposes of this paragraph, section 318 (a) (2) (C) shall be applied without regard to the 50 percent limitation contained therein. (2) AMOUNT CONSTITUTING DIVIDEND.

(A) WHERE SUBSECTION (a) (1) APPLIES.—In the case of any acquisition of stock to which paragraph (1) (and not paragraph

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