Title 26, Internal Revenue CodeRelease 119-110
§306 Dispositions of Certain Stock
Title 26 › Subtitle A — Income Taxes › CHAPTER 1 — NORMAL TAXES AND SURTAXES › Subchapter C — Corporate Distributions and Adjustments › PART I — DISTRIBUTIONS BY CORPORATIONS › Subpart A — Effects on Recipients › § 306
Summary
When a shareholder sells or gives up certain special corporate stock, the money they get is usually taxed as ordinary income instead of a capital gain. If the sale is not a redemption, the sale price is treated first as ordinary income up to the stock’s share of what would have been a dividend if cash equal to the stock’s fair market value had been paid when the stock was given out. Any amount left after you subtract that ordinary-income portion and the stock’s tax basis is taxed as capital gain. You cannot claim a loss on these sales. If the sale is a redemption, the money is treated like a property distribution under the rules that apply to distributions. There are some exceptions and special rules. The ordinary-income rule does not apply if the sale ends the owner’s whole interest to an unrelated buyer, if certain redemptions or complete liquidations apply, if another tax rule says no gain or loss is recognized, or if the IRS is satisfied the deal was not done mainly to avoid tax. “Section 306 stock” means three kinds of non‑common or special stock (short descriptions: stock given tax-free instead of cash, stock received in certain reorganizations or separations when gain wasn’t recognized, and stock whose tax basis comes from earlier section‑306 stock). Stock rights count as stock, and exercised rights are treated as if the stock were distributed when the rights were given. If the stock’s terms change a lot, values and dividend shares are figured using the higher time value. The ordinary-income part is treated as coming from the same source as a dividend would be.
Full Legal Text
Title 26, §306
Internal Revenue Code, Source: USLM XML via OLRC
(a)General rule
If a shareholder sells or otherwise disposes of section 306 stock (as defined in subsection (c))—
(1)Dispositions other than redemptions
If such disposition is not a redemption (within the meaning of section 317(b))—
(A)The amount realized shall be treated as ordinary income. This subparagraph shall not apply to the extent that—
(i)the amount realized, exceeds
(ii)such stock’s ratable share of the amount which would have been a dividend at the time of distribution if (in lieu of section 306 stock) the corporation had distributed money in an amount equal to the fair market value of the stock at the time of distribution.
(B)Any excess of the amount realized over the sum of—
(i)the amount treated under subparagraph (A) as ordinary income, plus
(ii)the adjusted basis of the stock,
shall be treated as gain from the sale of such stock.
(C)No loss shall be recognized.
(D)Treatment as dividend.—
For purposes of section 1(h)(11) and such other provisions as the Secretary may specify, any amount treated as ordinary income under this paragraph shall be treated as a dividend received from the corporation.
(2)Redemption
If the disposition is a redemption, the amount realized shall be treated as a distribution of property to which section 301 applies.
(b)Exceptions
Subsection (a) shall not apply—
(1)Termination of shareholder’s interest, etc.
(A)Not in redemption
If the disposition—
(i)is not a redemption;
(ii)is not, directly or indirectly, to a person the ownership of whose stock would (under section 318(a)) be attributable to the shareholder; and
(iii)terminates the entire stock interest of the shareholder in the corporation (and for purposes of this clause, section 318(a) shall apply).
(B)In redemption
If the disposition is a redemption and paragraph (3) or (4) of section 302(b) applies.
(2)Liquidations
If the section 306 stock is redeemed in a distribution in complete liquidation to which part II (sec. 331 and following) applies.
(3)Where gain or loss is not recognized
To the extent that, under any provision of this subtitle, gain or loss to the shareholder is not recognized with respect to the disposition of the section 306 stock.
(4)Transactions not in avoidance
If it is established to the satisfaction of the Secretary—
(A)that the distribution, and the disposition or redemption, or
(B)in the case of a prior or simultaneous disposition (or redemption) of the stock with respect to which the section 306 stock disposed of (or redeemed) was issued, that the disposition (or redemption) of the section 306 stock,
was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax.
(c)section 306 stock defined
(1)In general
For purposes of this subchapter, the term “section 306 stock” means stock which meets the requirements of subparagraph (A), (B), or (C) of this paragraph. (A) Distributed to seller
(B)Received in a corporate reorganization or separation
Stock which is not common stock and— (i)
(ii)with respect to the receipt of which gain or loss to the shareholder was to any extent not recognized by reason of part III, but only to the extent that either the effect of the transaction was substantially the same as the receipt of a stock dividend, or the stock was received in exchange for section 306 stock.
For purposes of this section, a receipt of stock to which the foregoing provisions of this subparagraph apply shall be treated as a distribution of stock.
(C)Stock having transferred or substituted basis
Except as otherwise provided in subparagraph (B), stock the basis of which (in the hands of the shareholder selling or otherwise disposing of such stock) is determined by reference to the basis (in the hands of such shareholder or any other person) of section 306 stock.
(2)Exception where no earnings and profits
For purposes of this section, the term “section 306 stock” does not include any stock no part of the distribution of which would have been a dividend at the time of the distribution if money had been distributed in lieu of the stock.
(3)Certain stock acquired in section 351 exchange
The term “section 306 stock” also includes any stock which is not common stock acquired in an exchange to which section 351 applied if receipt of money (in lieu of the stock) would have been treated as a dividend to any extent. Rules similar to the rules of section 304(b)(2) shall apply—
(A)for purposes of the preceding sentence, and
(B)for purposes of determining the application of this section to any subsequent disposition of stock which is section 306 stock by reason of an exchange described in the preceding sentence.
(4)Application of attribution rules for certain purposes
For purposes of paragraphs (1)(B)(ii) and (3), section 318(a) shall apply. For purposes of applying the preceding sentence to paragraph (3), the rules of section 304(c)(3)(B) shall apply.
(d)Stock rights
For purposes of this section
(1)
(2)stock acquired through the exercise of stock rights shall be treated as stock distributed at the time of the distribution of the stock rights, to the extent of the fair market value of such rights at the time of the distribution.
(e)Convertible stock
For purposes of subsection (c)—
(1)if section 306 stock was issued with respect to common stock and later such section 306 stock is exchanged for common stock in the same corporation (whether or not such exchange is pursuant to a conversion privilege contained in the section 306 stock), then (except as provided in paragraph (2)) the common stock so received shall not be treated as section 306 stock; and
(2)common stock with respect to which there is a privilege of converting into stock other than common stock (or into property), whether or not the conversion privilege is contained in such stock, shall not be treated as common stock.
(f)Source of gain (g) Change in terms and conditions of stock
The amount treated under subsection (a)(1)(A) as ordinary income shall, for purposes of part I of subchapter N (sec. 861 and following, relating to determination of sources of income), 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 under the preceding sentence such amount is determined to be derived from sources within the United States, such amount shall be considered to be fixed or determinable annual or periodical gains, profits, and income within the meaning of section 871(a) or section 881(a), as the case may be.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2003—Subsec. (a)(1)(D). Pub. L. 108–27 added subpar. (D). 1990—Subsec. (h). Pub. L. 101–508 struck out subsec. (h) which related to stock received in distributions and reorganizations to which 1939 Code applied. 1984—Subsec. (b)(1). Pub. L. 98–369, § 712(i)(2), substituted “interest, etc.” for “interest” in heading. Subsec. (c)(3). Pub. L. 98–369, § 712(l)(6), incorporated existing second sentence in provision designated subpar. (A) and added subpar. (B). Subsec. (c)(4). Pub. L. 98–369, § 712(l)(5)(B), substituted “the rules of section 304(c)(3)(B) shall apply” for “section 318(a)(2)(C) and 318(a)(3)(C) shall be applied without regard to the 50 percent limitation contained therein”. 1982—Subsec. (b)(1)(B). Pub. L. 97–248, § 222(e)(2), substituted “paragraph (3) or (4) of section 302(b)” for “section 302(b)(3)”. Subsec. (b)(2). Pub. L. 97–248, § 222(e)(1)(A), struck out “partial or” before “complete liquidation”. Subsec. (c)(3). Pub. L. 97–248, § 226(b), added par. (3). Subsec. (c)(4). Pub. L. 97–248, § 227(a), added par. (4). 1980—Subsecs. (a)(3), (b)(5). Pub. L. 96–223 repealed the
Amendments
made by Pub. L. 95–600, § 702(a)(1), (2). See 1978 Amendment notes below. 1978—Subsec. (a)(3). Pub. L. 95–600, § 702(a)(1), added par. (3) which related to ordinary income from the sale or redemption of section 306 stock which was carryover basis property adjusted for 1976 value. See
Repeals
note below. Subsec. (b)(5). Pub. L. 95–600, § 702(a)(2), added par. (5) which provided that subsec. (a) of this section shall not apply to the extent that section 303 applies to a distribution in redemption of section 306 stock. See
Repeals
note below. 1976—Subsec. (a)(1)(A), (B)(i). Pub. L. 94–455, § 1901(b)(3)(J), substituted “ordinary income” for “gain from the sale of property which is not a capital asset”. Subsec. (b)(4). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”. Subsec. (f). Pub. L. 94–455, § 1901(b)(3)(J), substituted “ordinary income” for “gain from the sale of property which is not a capital asset”.
Statutory Notes and Related Subsidiaries
Effective Date
of 2003 AmendmentAmendment by Pub. L. 108–27 applicable, except as otherwise provided, to taxable years beginning after Dec. 31, 2002, see section 302(f) of Pub. L. 108–27, set out as an Effective and Termination Dates of 2003 Amendment note under section 1 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 AmendmentAmendment by section 222(e)(1)(A), (2) of Pub. L. 97–248 applicable to distributions after Aug. 31, 1982, with exceptions for certain partial liquidations, see section 222(f) of Pub. L. 97–248, set out as a note under section 302 of this title. Amendment by section 226(b) of Pub. L. 97–248 applicable to transfers occurring after Aug. 31, 1982, except for certain transfers pursuant to an application to form a BHC filed with the Federal Reserve Board before Aug. 16, 1982, see section 226(c) of Pub. L. 97–248, set out as a note under section 304 of this title. Pub. L. 97–248, title II, § 227(c)(1), Sept. 3, 1982, 96 Stat. 492, provided that: “The amendment made by subsection (a) [amending this section] shall apply to stock received after August 31, 1982, in taxable years ending after such date.”
Effective Date
of 1980 Amendment and Revival of Prior LawAmendment by Pub. L. 96–223 (repealing section 702(a)(1), (2) of Pub. L. 95–600 and the
Amendments
made thereby, which had amended this section) applicable in respect of decedents dying after Dec. 31, 1976, and, except for certain elections, this title to be applied and administered as if those repealed provisions had not been enacted, see section 401(b), (e) of Pub. L. 96–223, set out as a note under section 1023 of this title.
Effective Date
of 1978 Amendment Pub. L. 95–600, title VII, § 702(a)(3), Nov. 6, 1978, 92 Stat. 2925, provided that the
Amendments
made by section 702(a) of Pub. L. 95–600 would apply to the estates of decedents dying after Dec. 31, 1979, prior to repeal by Pub. L. 96–223, title IV, § 401(a), Apr. 2, 1980, 94 Stat. 299.
Effective Date
of 1976 AmendmentAmendment by section 1901(b)(3)(J) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title.
Repeals
Pub. L. 95–600, § 702(a)(1), (2), cited as a credit to this section, and the
Amendments
made thereby, were repealed by Pub. L. 96–223, title IV, § 401(a), Apr. 2, 1980, 94 Stat. 299, resulting in the text of this section reading as it read prior to enactment of section 702(a)(1), (2). See
Effective Date
of 1980 Amendment and Revival of Prior Law note above.
Savings Provision
For provisions that nothing in amendment by 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.
Reference
Citations & Metadata
Citation
26 U.S.C. § 306
Title 26, Internal Revenue Code
Last Updated
Sep 22, 2026
Release point: 119-110