26 U.S.C. § 302

Distributions in redemption of stock

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(a) General rule

If a corporation redeems its stock (within the meaning of section 317(b)), and if paragraph (1), (2), (3), (4), or (5) 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) DefinitionsFor 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) Redemption from noncorporate shareholder in partial liquidationSubsection (a) shall apply to a distribution if such distribution is—(A) in redemption of stock held by a shareholder who is not a corporation, and(B) in partial liquidation of the distributing corporation.(5) Redemptions by certain regulated investment companiesExcept to the extent provided in regulations prescribed by the Secretary, subsection (a) shall apply to any distribution in redemption of stock of a publicly offered regulated investment company (within the meaning of section 67(c)(2)(B)) if—(A) such redemption is upon the demand of the stockholder, and(B) such company issues only stock which is redeemable upon the demand of the stockholder.(6) 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 an interest in the corporation within the 10-year period beginning on the date of the distribution shall not apply.

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 by regulations prescribes, files an agreement to notify the Secretary 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) notifies the Secretary 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.(C) Special rule for waivers by entities(i) In generalSubparagraph (A) shall not apply to a distribution to any entity unless—(I) such entity and each related person meet the requirements of clauses (i), (ii), and (iii) of subparagraph (A), and(II) each related person agrees to be jointly and severally liable for any deficiency (including interest and additions to tax) resulting from an acquisition described in clause (ii) of subparagraph (A). In any case to which the preceding sentence applies, the second sentence of subparagraph (A) and subparagraph (B)(ii) shall be applied by substituting “distributee or any related person” for “distributee” each place it appears.(ii) DefinitionsFor purposes of this subparagraph—(I) the term “entity” means a partnership, estate, trust, or corporation; and(II) the term “related person” means any person to whom ownership of stock in the corporation is (at the time of the distribution) attributable under section 318(a)(1) if such stock is further attributable to the entity under section 318(a)(3).(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 subsection (a) of this section does not apply, such redemption shall be treated as a distribution of property to which section 301 applies.

(e) Partial liquidation defined(1) In generalFor purposes of subsection (b)(4), a distribution shall be treated as in partial liquidation of a corporation if—(A) the distribution is not essentially equivalent to a dividend (determined at the corporate level rather than at the shareholder level), and(B) the distribution is pursuant to a plan and occurs within the taxable year in which the plan is adopted or within the succeeding taxable year.(2) Termination of businessThe distributions which meet the requirements of paragraph (1)(A) shall include (but shall not be limited to) a distribution which meets the requirements of subparagraphs (A) and (B) of this paragraph:(A) The distribution is attributable to the distributing corporation’s ceasing to conduct, or consists of the assets of, a qualified trade or business.(B) Immediately after the distribution, the distributing corporation is actively engaged in the conduct of a qualified trade or business.(3) Qualified trade or businessFor purposes of paragraph (2), the term “qualified trade or business” means any trade or business which—(A) was actively conducted throughout the 5-year period ending on the date of the redemption, and(B) was not acquired by the corporation within such period in a transaction in which gain or loss was recognized in whole or in part.(4) Redemption may be pro rata

Whether or not a redemption meets the requirements of subparagraphs (A) and (B) of paragraph (2) shall be determined without regard to whether or not the redemption is pro rata with respect to all of the shareholders of the corporation.

(5) Treatment of certain pass-thru entities

For purposes of determining under subsection (b)(4) whether any stock is held by a shareholder who is not a corporation, any stock held by a partnership, estate, or trust shall be treated as if it were actually held proportionately by its partners or beneficiaries.

(f) Cross referencesFor 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 complete liquidation, see section 331.(Aug. 16, 1954, ch. 736, 68A Stat. 85; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 96–589, § 5(b), Dec. 24, 1980, 94 Stat. 3405; Pub. L. 97–248, title II, §§ 222(c), 228(a), Sept. 3, 1982, 96 Stat. 478, 493; Pub. L. 98–369, div. A, title VII, § 712(i)(1), July 18, 1984, 98 Stat. 948; Pub. L. 111–325, title III, § 306(a), Dec. 22, 2010, 124 Stat. 3549.)Editorial NotesAmendments

2010—Subsec. (a). Pub. L. 111–325, § 306(a)(2), substituted “(4), or (5)” for “or (4)”.

Subsec. (b)(5), (6). Pub. L. 111–325, § 306(a)(1), added par. (5) and redesignated former par. (5) as (6).

1984—Subsec. (f)(3). Pub. L. 98–369 substituted “complete liquidation” for “partial or complete liquidation”.

1982—Subsec. (a). Pub. L. 97–248, § 222(c)(3), substituted “paragraph (1), (2), (3), or (4)” for “paragraph (1), (2), or (3)”.

Subsec. (b)(4), (5). Pub. L. 97–248, § 222(c)(1), (4), added par. (4), redesignated former par. (4) as (5) and substituted “paragraph (2), (3), or (4)” for “paragraph (2) or (3)” after “to meet the requirements of”, and “paragraph (1), (2), or (4)” for “paragraph (1) or (2)” after “and also the requirements of”.

Subsec. (c)(2)(C). Pub. L. 97–248, § 228(a), added subpar. (C).

Subsecs. (e), (f). Pub. L. 97–248, § 222(c)(2), added subsec. (e) and redesignated former subsec. (e) as (f).

1980—Subsec. (a). Pub. L. 96–589, § 5(b)(2)(A), struck out reference to par. (4) of subsec. (b).

Subsec. (b)(4), (5). Pub. L. 96–589, § 5(b)(1), (2)(B), redesignated par. (5) as (4) and struck out reference to par. (4) in two places. Former par. (4) was struck out.

1976—Subsec. (c)(2). Pub. L. 94–455 struck out “or his delegate” after “Secretary” wherever appearing.

Statutory Notes and Related SubsidiariesEffective Date of 2010 Amendment

Amendment by Pub. L. 111–325 applicable to distributions after Dec. 22, 2010, see section 306(c) of Pub. L. 111–325, set out as a note under section 267 of this title.

Effective Date of 1984 Amendment

Amendment by Pub. L. 98–369 effective as if included in the provision of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97–248, to which such amendment relates, see section 715 of Pub. L. 98–369, set out as a note under section 31 of this title.

Effective Date of 1982 Amendment; Partial Liquidations

Pub. L. 97–248, title II, § 228(b), Sept. 3, 1982, 96 Stat. 493, provided that: “The amendment made by subsection (a) [amending this section] shall apply with respect to distributions after August 31, 1982, in taxable years ending after such date.”

Pub. L. 97–248, title II, § 222(f), Sept. 3, 1982, 96 Stat. 481, as amended by Pub. L. 97–448, title III, § 306(a)(6)(A), Jan. 12, 1983, 96 Stat. 2402; Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that:“(1)In general.—The amendments made by this section [amending this section and sections 306, 312, 331, 334, 336, 341, 346, 543, and 562 of this title and repealing section 338 of this title] shall apply to distributions after August 31, 1982.“(2)Exceptions.—“(A)Ruling requests.—The amendments made by this section shall not apply to distributions made by any corporation if—“(i)(I) on July 22, 1982, there was a ruling request by such corporation pending with the Internal Revenue Service as to whether such distributions would qualify as a partial liquidation, or“(II) within the period beginning on July 12, 1981, and ending on July 22, 1982, the Internal Revenue Service granted a ruling to such corporation that the distributions would qualify as a partial liquidation, and“(ii) such distributions are pursuant to a plan of partial liquidation adopted before October 1, 1982 (or, if later, 90 days after the date on which the Internal Revenue Service granted a ruling pursuant to the request described in clause (i)(I)).“(B)Plans adopted before july 23, 1982.—The amendments made by this section shall not apply to distributions made pursuant to a plan of partial liquidation adopted before July 23, 1982.“(C)Control acquired after 1981 and before july 23, 1982.—The amendments made by this section shall not apply to distributions made pursuant to a plan of partial liquidation adopted before October 1, 1982, where control of the corporation making the distributions was acquired after December 31, 1981, and before July 23, 1982.“(D)Tender offer or binding contract outstanding on july 22, 1982.—“(i)In general.—The amendments made by this section shall not apply to distributions made by a corporation if—“(I) such distributions are pursuant to a plan of liquidation adopted before October 1, 1982, and“(II) control of such corporation was acquired after July 22, 1982, pursuant to a tender offer or binding contract outstanding on such date.“(ii)Extension of time for adopting plan where acquisition subject to federal regulatory approval.—If the acquisition described in clause (i)(II) is subject to approval by a Federal regulatory agency, clause (i) shall be applied by substituting for ‘October 1, 1982’ the date which is 90 days after the date on which approval by the Federal regulatory agency of such acquisition becomes final.“(iii)Special rule where offer subject to approval by foreign regulatory body.—In any case where an offer to acquire stock in a corporation was subject to intervention by a foreign regulatory body and a public announcement of such an offer resulted in the intervention by such foreign regulatory body before July 23, 1982—“(I) such public announcement shall be treated as a tender offer, and“(II) clause (i) shall be applied by substituting for ‘October 1, 1982’ the date which is 90 days after the date on which such regulatory body approves a public offer to acquire stock in such corporation.“(iv)Special rule where one-third of shares acquired during march and april 1982.—If—“(I) one-third or more of the shares of a corporation were acquired by another corporation during March and April 1982, and“(II) during March or April 1982, the acquiring corporation filed with the Federal Trade Commission notification of its intent to acquire control of the acquired corporation, subclause (II) of clause (i) shall not apply with respect to distributions made by the acquired corporation.“(E)Insurance companies.—The amendments made by this section shall not apply to distributions made by an insurance company pursuant to a plan of partial liquidation adopted before October 1, 1982, where control was acquired by the distributee or its parent after December 31, 1980, and before July 23, 1982, and the conduct of the insurance business by the distributee is conditioned on approval by a State regulatory authority.For purposes of this paragraph, the term ‘control’ has the meaning given to such term by section 368(c) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], except that in applying such section both direct and indirect ownership of stock shall be taken into account.“(3)Approval of plan by board of directors.—For purposes of—“(A) paragraph (2), and“(B) applying section 346(a)(2) of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act) [Sept. 3, 1982] to distributions to which (but for paragraph (2)) the amendments made by this section would apply,a plan of liquidation shall be treated as adopted when approved by the corporation’s board of directors.“(4)Coordination with amendments made by section 224.—For purposes of section 338(e)(2)(C) of the Internal Revenue Code of 1986 (as added by section 224), any property acquired in a distribution to which the amendments made by this section do not apply by reason of paragraph (2) shall be treated as acquired before September 1, 1982.”

Effective Date of 1980 Amendment

Amendment by Pub. L. 96–589 applicable to stock which is issued after Dec. 31, 1980, except as otherwise provided, see section 7(d)(2), (f) of Pub. L. 96–589, set out as a note under section 108 of this title.

Savings Provisions

Applicability of subsec. (b)(1) to the determination of gross investment income under sections 4940 and 4948(a) of this title, see section 101(l)(8) of Pub. L. 91–172, set out as a note under section 4940 of this title.

Notes of Decisions

Cited in 48 cases (2 in the last 5 years), 1959–2023 · leading case: Gitlitz v. Comm'r, 531 U.S. 206 (2001).

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Gitlitz v. Comm'r, 531 U.S. 206 (2001). · cites it 2× “III) (determining how to allocate interest expense to portions of insurance policies); 26 U. S. C. § 302 (e)(1)(A) (determining whether a stock distribution shall be treated as a partial liquidation).”

Petersen v. Comm'r of Internal Revenue, 924 F.3d 1111 (10th Cir. 2019). · cites it 2× “The court applied § 318 to 26 U.S.C. § 302 , entitled "Distributions in redemption of stock.”

Comm'r v. Fink, 483 U.S. 89 (1987). · cites it 2× “26 U. S. C. § 302 (b). Although the Finks did not receive a direct payment of cash or other property, they hoped to be compensated by an increase in the value of their remaining shares.”

Reddam v. Comm'r, 755 F.3d 1051 (9th Cir. 2014). · cites it 2× “Thus, on his 1999 tax returns, Reddam calculated his total basis in the Deutsche Bank stock, including the purchase prices and the various brokerage fees, as approximately $43,800,000. When Cormorant sold its shares in Deutsche Bank back to the Bank for $42,000,000, Cormorant…”

Boise Cascade Corp. v. United States, 329 F.3d 751 (9th Cir. 2003). · cites it 2× “The court agreed with the Magistrate Judge that the redemptions qualified as dividends under 26 U.S.C. § 302 (b) and were therefore deductible under § 404(k).”

Diebold Found., Inc. v. Comm'r of Internal Revenue, 736 F.3d 172 (2d Cir. 2013). “See 26 U.S.C. §§ 302 (a), 331, 1001. 2 . On May 28, 1999, the Marital Trust transferred these shares to Diebold New York.”

Jack O. Chertkof & Sophie Chertkof v. Comm'r of Internal Revenue, 649 F.2d 264 (4th Cir. 1981). · cites it 2× “Taxpayer’s asserted ground for capital gains treatment was under 26 U.S.C. § 302 (b)(3)— “complete redemption of all the stock of the corporation owned by the shareholder.”

Sofco Erectors, Inc. v. Trs. of the Ohio Operating Eng'rs Pension Fund, 15 F.4th 407 (6th Cir. 2021). “is [not] so insubstantial as to make the redemption[ of corporate stock] ‘essentially equivalent to a dividend’” under 26 U.S.C. § 302 (b)(1)). And we have even done so en banc, noting in a copyright-infringement matter that the use of “as much as 30 percent of one copyrighted…”

Comm'r v. Nat'l Alfalfa Dehydrating & Milling Co., 417 U.S. 134 (1974). “The ruling went on to state, “Assuming but not determining that the 5% debenture bonds to be issued qualify as securities (create a genuine relationship of debtor and creditor), gain or loss will be recognized to the preferred stockholders [under § 302 (a) of the Code, 26 U. S.…”

William F. & Gwendolyn Wright v. United States, 482 F.2d 600 (8th Cir. 1973). · cites it 2× “” 6 Since the note was held not to have the effect of a dividend, the gain was viewed as realized from the exchange of property and taxed as long term capital gain.”

Fehrs Fin. Co., Cross-Appellee v. Comm'r of Internal Revenue, Cross-Appellant, 487 F.2d 184 (8th Cir. 1973). · cites it 2× “That section frees a taxpayer from the application of the attribution rules to its redemption provided the three tests are fulfilled. There is no question that the Fehrs themselves no longer own any Rental stock.”

Henry T. Patterson Trust, by Its Tr., the Reeves Banking & Trust Co. v. United States, 729 F.2d 1089 (6th Cir. 1984). “26 U.S.C. §§ 302 (c), 318. 2 Applying this statute, it is readily apparent that prior to the redemption, the Trust constructively owned 345 shares of the Puritan company, computed from its own shares (200), Ella’s holdings (25), and the shares owned by Ella’s children (John —…”

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— 26 U.S.C. § 302(b) — 1 case

H. H. King Flour Mills Co. v. United States, 325 F. Supp. 1085 (D. Minnesota 1971).

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