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) Redemption from noncorporate shareholder in partial
 liquidation
 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) 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.
 (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 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 general
 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).
 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) Definitions
 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) 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 general
 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) Termination of business
 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) Qualified trade or business
 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) 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 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 complete liquidation, see
 section 331.