Title 26 — Internal Revenue CodeRelease 119-73
§302 Distributions in redemption of stock
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter C— - Corporate Distributions and Adjustments › Part PART I— - DISTRIBUTIONS BY CORPORATIONS › Subpart Subpart A— - Effects on Recipients › § 302
Summary
When a company buys back a shareholder’s stock, the payment can count as a sale (money in exchange for the stock) instead of a dividend if one of a few tests is met. That happens when the buyback is not basically a dividend; when it leaves the shareholder with much less voting power (including owning under 50% right after, measured by comparing voting shares before and after); when the shareholder sells all their stock in the company; when a non-corporate shareholder’s stock is bought back as part of winding down part of the business; or when a publicly offered investment company that only issues shares redeemable on demand pays a shareholder who asks for redemption. If a full buyout also meets other tests, a special 10-year rule about later stock purchases may not apply. Stock ownership for these tests is usually measured by the usual attribution rules. But for a complete buyout there is a special exception: if the person has no role in the company afterward, does not get back any interest for 10 years, and files an agreement to notify the IRS of any later acquisition, some attribution rules won’t apply. That exception fails if certain transfers happened within the prior 10 years or if related parties don’t meet the same conditions. If none of the sale tests apply, the buyback is treated as a regular distribution (like a dividend or property distribution). There are also separate rules for redemptions to pay death taxes, for certain special-stock rules, and for complete liquidation.
Full Legal Text
Title 26, §302
Internal Revenue Code — Source: USLM XML via OLRC
(a)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)(1)Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.
(2)(A)Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder.
(B)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)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,
(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.
(D)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)Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.
(4)Subsection (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)Except 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)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.
(c)(1)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)(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.
(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.
(C)(i)Subparagraph (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).
(ii)For 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)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)(1)For 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)The 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)For 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)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)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)For special rules relating to redemption—
(1)Of stock to pay death taxes, see section 303.
(2)Of section 306 stock, see section 306.
(3)Of stock in complete liquidation, see section 331.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
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 Subsidiaries
Effective Date
of 2010 AmendmentAmendment 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 AmendmentAmendment 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 section 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 AmendmentAmendment 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 Provision
sApplicability of subsec. (b)(1) to the determination of gross investment income under section 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.
Reference
Citations & Metadata
Citation
26 U.S.C. § 302
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73