---
kind: "range"
citation: "26 C.F.R. §§ 1.306-1–1.306-3"
title: "26"
from: "1.306-1"
to: "1.306-3"
count: 3
url: "https://uscodex.org/cfr/26/1.306-1..1.306-3"
---

# §1.306-1. General.

- (a) [Section 306](/cfr/26/306.md) provides, in general, that the proceeds from the sale or redemption of certain stock (referred to as “[section 306](/cfr/26/306.md) stock”) shall be treated either as ordinary income or as a distribution of property to which [section 301](/cfr/26/301.md) applies. [Section 306](/cfr/26/306.md) stock is defined in [section 306(c)](/cfr/26/306.md?p=c) and is usually preferred stock received either as a nontaxable dividend or in a transaction in which no gain or loss is recognized. [Section 306(b)](/cfr/26/306.md?p=b) lists certain circumstances in which the special rules of [section 306(a)](/cfr/26/306.md?p=a) shall not apply.
- (b)
  - (1) If a shareholder sells or otherwise disposes of [section 306](/cfr/26/306.md) stock (other than by redemption or within the exceptions listed in [section 306(b)](/cfr/26/306.md?p=b)), the entire proceeds received from such disposition shall be treated as ordinary income to the extent that the fair market value of the stock sold, on the date distributed to the shareholder, would have been a dividend to such shareholder had the distributing corporation distributed cash in lieu of stock. Any excess of the amount received over the sum of the amount treated as ordinary income plus the adjusted basis of the stock disposed of, shall be treated as gain from the sale of a capital asset or noncapital asset as the case may be. No loss shall be recognized. No reduction of earnings and profits results from any disposition of stock other than a redemption. The term disposition under [section 306(a)(1)](/cfr/26/306.md?p=a-1) includes, among other things, pledges of stock under certain circumstances, particularly where the pledgee can look only to the stock itself as its security.
  - (2) [Section 306(a)(1)](/cfr/26/306.md?p=a-1) may be illustrated by the following examples:
- (c) The entire amount received by a shareholder from the redemption of [section 306](/cfr/26/306.md) stock shall be treated as a distribution of property under [section 301](/cfr/26/301.md). See also [section 303](/cfr/26/303.md) (relating to distribution in redemption of stock to pay death taxes).

# §1.306-2. Exception.

- (a) If a shareholder terminates his entire stock interest in a corporation—
  - (1) By a sale or other disposition within the requirements of [section 306(b)(1)(A)](/cfr/26/306.md?p=b-1-A), or
  - (2) By redemption under [section 302(b)(3)](/cfr/26/302.md?p=b-3) (through the application of [section 306(b)(1)(B)](/cfr/26/306.md?p=b-1-B)),
- (b) **Section 306(a) does not apply to—**
  - (1) Redemptions of [section 306](/cfr/26/306.md) stock pursuant to a partial or complete liquidation of a corporation to which part II ([section 331](/cfr/26/331.md) and following), subchapter C, chapter 1 of the Code applies,
  - (2) Exchanges of [section 306](/cfr/26/306.md) stock solely for stock in connection with a reorganization or in an exchange under section [351](/cfr/26/351.md), [355](/cfr/26/355.md), or [section 1036](/cfr/26/1036.md) (relating to exchanges of stock for stock in the same corporation) to the extent that gain or loss is not recognized to the shareholder as the result of the exchange of the stock (see [paragraph (d)](/cfr/26/1.306-3.md?p=d) of § 1.306-3 relative to the receipt of other property), and
  - (3) A disposition or redemption, if it is established to the satisfaction of the Commissioner that the distribution, and the disposition or redemption, was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax. However, in the case of a prior or simultaneous disposition (or redemption) of the stock with respect to which the [section 306](/cfr/26/306.md) stock disposed of (or redeemed) was issued, it is not necessary to establish that the distribution was not in pursuance of such a plan. For example, in the absence of such a plan and of any other facts the first sentence of this subparagraph would be applicable to the case of dividends and isolated dispositions of [section 306](/cfr/26/306.md) stock by minority shareholders. Similarly, in the absence of such a plan and of any other facts, if a shareholder received a distribution of 100 shares of [section 306](/cfr/26/306.md) stock on his holdings of 100 shares of voting common stock in a corporation and sells his voting common stock before he disposes of his [section 306](/cfr/26/306.md) stock, the subsequent disposition of his [section 306](/cfr/26/306.md) stock would not ordinarily be considered a disposition one of the principal purposes of which is the avoidance of Federal income tax.

# §1.306-3. Section 306 stock defined.

- (a) For the purpose of subchapter C, chapter 1 of the code, the term [section 306](/cfr/26/306.md) stock means stock which meets the requirements of [section 306(c)(1)](/cfr/26/306.md?p=c-1). Any class of stock distributed to a shareholder in a transaction in which no amount is includible in the income of the shareholder or no gain or loss is recognized may be [section 306](/cfr/26/306.md) stock, if a distribution of money by the distributing corporation in lieu of such stock would have been a dividend in whole or in part. However, except as provided in [section 306(g)](/cfr/26/306.md?p=g), if no part of a distribution of money by the distributing corporation in lieu of such stock would have been a dividend, the stock distributed will not constitute [section 306](/cfr/26/306.md) stock.
- (b) For the purpose of [section 306](/cfr/26/306.md), rights to acquire stock shall be treated as stock. Such rights shall not be [section 306](/cfr/26/306.md) stock if no part of the distribution would have been a dividend if money had been distributed in lieu of the rights. When stock is acquired by the exercise of rights which are treated at [section 306](/cfr/26/306.md) stock, the stock acquired is [section 306](/cfr/26/306.md) stock. Upon the disposition of such stock (other than by redemption or within the exceptions listed in [section 306(b)](/cfr/26/306.md?p=b)), the proceeds received from the disposition shall be treated as ordinary income to the extent that the fair market value of the stock rights, on the date distributed to the shareholder, would have been a dividend to the shareholder had the distributing corporation distributed cash in lieu of stock rights. Any excess of the amount realized over the sum of the amount treated as ordinary income plus the adjusted basis of the stock, shall be treated as gain from the sale of the stock.
- (c) [Section 306(c)(1)(A)](/cfr/26/306.md?p=c-1-A) provides that [section 306](/cfr/26/306.md) stock is any stock (other than common issued with respect to common) distributed to the shareholder selling or otherwise disposing thereof if, under [section 305(a)](/cfr/26/305.md?p=a) (relating to distributions of stock and stock rights) any part of the distribution was not included in the gross income of the distributee.
- (d) [Section 306(c)(1)(B)](/cfr/26/306.md?p=c-1-B) includes in the definition of [section 306](/cfr/26/306.md) stock any stock except common stock, which is received by a shareholder in connection with a reorganization under [section 368](/cfr/26/368.md) or in a distribution or exchange under [section 355](/cfr/26/355.md) (or so much of [section 356](/cfr/26/356.md) as relates to [section 355](/cfr/26/355.md)) provided the effect of the transaction is substantially the same as the receipt of a stock dividend, or the stock is received in exchange for [section 306](/cfr/26/306.md) stock. If, in a transaction to which [section 356](/cfr/26/356.md) is applicable, a shareholder exchanges [section 306](/cfr/26/306.md) stock for stock and money or other property, the entire amount of such money and of the fair market value of the other property (not limited to the gain recognized) shall be treated as a distribution of property to which [section 301](/cfr/26/301.md) applies. Common stock received in exchange for [section 306](/cfr/26/306.md) stock in a recapitalization shall not be considered [section 306](/cfr/26/306.md) stock. Ordinarily, [section 306](/cfr/26/306.md) stock includes stock which is not common stock received in pursuance of a plan of reorganization (within the meaning of [section 368(a)](/cfr/26/368.md?p=a)) or received in a distribution or exchange to which [section 355](/cfr/26/355.md) (or so much of [section 356](/cfr/26/356.md) as relates to [section 355](/cfr/26/355.md)) applies if cash received in lieu of such stock would have been treated as a dividend under [section 356(a)(2)](/cfr/26/356.md?p=a-2) or would have been treated as a distribution to which [section 301](/cfr/26/301.md) applies by virtue of [section 356(b)](/cfr/26/356.md?p=b) or [section 302(d)](/cfr/26/302.md?p=d). The application of the preceding sentence is illustrated by the following examples:
- (e) [Section 306(c)(1)(C)](/cfr/26/306.md?p=c-1-C) includes in the definition of [section 306](/cfr/26/306.md) stock any stock (except as provided in [section 306(c)(1)(B)](/cfr/26/306.md?p=c-1-B)) the basis of which in the hands of the person disposing of such stock, is determined by reference to [section 306](/cfr/26/306.md) stock held by such shareholder or any other person. Under this paragraph common stock can be [section 306](/cfr/26/306.md) stock. Thus, if a person owning [section 306](/cfr/26/306.md) stock in Corporation A transfers it to Corporation B which is controlled by him in exchange for common stock of Corporation B in a transaction to which [section 351](/cfr/26/351.md) is applicable, the common stock so received by him would be [section 306](/cfr/26/306.md) stock and subject to the provisions of [section 306(a)](/cfr/26/306.md?p=a) on its disposition. In addition, the [section 306](/cfr/26/306.md) stock transferred is [section 306](/cfr/26/306.md) stock in the hands of Corporation B, the transferee. [Section 306](/cfr/26/306.md) stock transferred by gift remains [section 306](/cfr/26/306.md) stock in the hands of the donee. Stock received in exchange for [section 306](/cfr/26/306.md) stock under [section 1036(a)](/cfr/26/1036.md?p=a) (relating to exchange of stock for stock in the same corporation) or under so much of [section 1031(b)](/cfr/26/1031.md?p=b) as relates to [section 1036(a)](/cfr/26/1036.md?p=a) becomes [section 306](/cfr/26/306.md) stock and acquires, for purposes of [section 306](/cfr/26/306.md), the characteristics of the [section 306](/cfr/26/306.md) stock exchanged. The entire amount of the fair market value of the other property received in such transaction shall be considered as received upon a disposition (other than a redemption) to which [section 306(a)](/cfr/26/306.md?p=a) applies. [Section 306](/cfr/26/306.md) stock ceases to be so classified if the basis of such stock is determined by reference to its fair market value on the date of the decedent-stockholder's death under [section 1014](/cfr/26/1014.md) or the optional valuation date under [section 2032](/cfr/26/2032.md). [Section 306](/cfr/26/306.md) stock continues to be so classified if the basis of such stock is determined under [section 1022](/cfr/26/1022.md).
- (f) If [section 306](/cfr/26/306.md) stock which was distributed with respect to common stock is exchanged for common stock in the same corporation (whether or not such exchange is pursuant to a conversion privilege contained in [section 306](/cfr/26/306.md) stock), such common stock shall not be [section 306](/cfr/26/306.md) stock. This paragraph applies to exchanges not coming within the purview of [section 306(c)(1)(B)](/cfr/26/306.md?p=c-1-B). Common stock which is convertible into stock other than common stock or into property, shall not be considered common stock. It is immaterial whether the conversion privilege is contained in the stock or in some type of collateral agreement.
- (g) If there is a substantial change in the terms and conditions of any stock, then, for the purpose of this section—
  - (1) The fair market value of such stock shall be the fair market value at the time of distribution or the fair market value at the time of such change, whichever 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 by reference to the time of distribution or by reference to the time of such change, whichever ratable share is higher; and
  - (3) [Section 306(c)(2)](/cfr/26/306.md?p=c-2) shall be inapplicable if there would have been a dividend to any extent if money had been distributed in lieu of the stock either at the time of the distribution or at the time of such change.
- (h) When [section 306](/cfr/26/306.md) stock is disposed of, the amount treated under [section 306(a)(1)(A)](/cfr/26/306.md?p=a-1-A) as ordinary income, for the purposes of part I, subchapter N, chapter 1 of the Code, 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 the amount is determined to be derived from sources within the United States, the amount shall be considered to be fixed or determinable annual or periodic gains, profits, and income within the meaning of [section 871(a)](/cfr/26/871.md?p=a) or [section 881(a)](/cfr/26/881.md?p=a), relating, respectively, to the tax on nonresident alien individuals and on foreign corporations not engaged in business in the United States.
- (i) [Section 306](/cfr/26/306.md) shall be inapplicable to stock received before June 22, 1954, and to stock received on or after June 22, 1954, in transactions subject to the provisions of the Internal Revenue Code of 1939.