Sec. 304. Redemption through use of related corporations
 
 (a) Treatment of certain stock purchases
 (1) Acquisition by related corporation (other than subsidiary)
 For purposes of sections 302 and 303, if -
 (A) one or more persons are in control of each of two
 corporations, and
 (B) in return for property, one of the corporations acquires
 stock in the other corporation from the person (or persons) so
 in control,
 then (unless paragraph (2) applies) such property shall be
 treated as a distribution in redemption of the stock of the
 corporation acquiring such stock. To the extent that such
 distribution is treated as a distribution to which section 301
  applies, the transferor and the acquiring corporation shall be
 treated in the same manner as if the transferor had transferred
 the stock so acquired to the acquiring corporation in exchange
 for stock of the acquiring corporation in a transaction to which
 section 351(a) applies, and then the acquiring corporation had
 redeemed the stock it was treated as issuing in such transaction.
 (2) Acquisition by subsidiary
 For purposes of sections 302 and 303, if -
 (A) in return for property, one corporation acquires from a
 shareholder of another corporation stock in such other
 corporation, and
 (B) the issuing corporation controls the acquiring
 corporation,
 then such property shall be treated as a distribution in
 redemption of the stock of the issuing corporation.
 (b) Special rules for application of subsection (a)
 (1) Rules for determinations under section 302(b)
 In the case of any acquisition of stock to which subsection (a)
 of this section applies, determinations as to whether the
 acquisition is, by reason of section 302(b), to be treated as a
 distribution in part or full payment in exchange for the stock
 shall be made by reference to the stock of the issuing
 corporation. In applying section 318(a) (relating to
 constructive ownership of stock) with respect to section 302(b)
 for purposes of this paragraph, sections 318(a)(2)(C) and
 318(a)(3)(C) shall be applied without regard to the 50 percent
 limitation contained therein.
 (2) Amount constituting dividend
 In the case of any acquisition of stock to which subsection (a)
 applies, the determination of the amount which is a dividend (and
 the source thereof) shall be made as if the property were
 distributed -
 (A) by the acquiring corporation to the extent of its
 earnings and profits, and
 (B) then by the issuing corporation to the extent of its
 earnings and profits.
 (3) Coordination with section 351
 (A) Property treated as received in redemption
 Except as otherwise provided in this paragraph, subsection
 (a) (and not section 351 and not so much of sections 357 and
 358 as relates to section 351) shall apply to any property
 received in a distribution described in subsection (a).
 (B) Certain assumptions of liability, etc.
 (i) In general
  In the case of an acquisition described in section 351,
 subsection (a) shall not apply to any liability -
 (I) assumed by the acquiring corporation, or
 (II) to which the stock is subject,
 if such liability was incurred by the transferor to acquire
 the stock. For purposes of the preceding sentence, the term
 ''stock'' means stock referred to in paragraph (1)(B) or
 (2)(A) of subsection (a).
 (ii) Extension of obligations, etc.
 For purposes of clause (i), an extension, renewal, or
 refinancing of a liability which meets the requirements of
 clause (i) shall be treated as meeting such requirements.
 (iii) Clause (i) does not apply to stock acquired from
 related person except where complete termination
 Clause (i) shall apply only to stock acquired by the
 transferor from a person -
 (I) none of whose stock is attributable to the transferor
 under section 318(a) (other than paragraph (4) thereof), or
 (II) who satisfies rules similar to the rules of section
 302(c)(2) with respect to both the acquiring and the
 issuing corporations (determined as if such person were a
 distributee of each such corporation).
 (C) Distributions incident to formation of bank holding
 companies
 If -
 (i) pursuant to a plan, control of a bank is acquired and
 within 2 years after the date on which such control is
 acquired, stock constituting control of such bank is
 transferred to a BHC in connection with its formation,
 (ii) incident to the formation of the BHC there is a
 distribution of property described in subsection (a), and
 (iii) the shareholders of the BHC who receive distributions
 of such property do not have control of such BHC,
 then, subsection (a) shall not apply to any securities received
 by a qualified minority shareholder incident to the formation
 of such BHC. For purposes of this subparagraph, any assumption
 of (or acquisition of stock subject to) a liability under
 subparagraph (B) shall not be treated as a distribution of
 property.
 (D) Definitions and special rule
 For purposes of subparagraph (C) and this subparagraph -
 (i) Qualified minority shareholder
  The term ''qualified minority shareholder'' means any
 shareholder who owns less than 10 percent (in value) of the
 stock of the BHC. For purposes of the preceding sentence, the
 rules of paragraph (3) of subsection (c) shall apply.
 (ii) BHC
 The term ''BHC'' means a bank holding company (within the
 meaning of section 2(a) of the Bank Holding Company Act of
 1956).
 (iii) Special rule in case of BHC's formed before 1985
  In the case of a BHC which is formed before 1985, clause
 (i) of subparagraph (C) shall not apply.
 (4) Treatment of certain intragroup transactions
 (A) In general
 In the case of any transfer described in subsection (a) of
 stock from 1 member of an affiliated group to another member of
 such group, proper adjustments shall be made to -
 (i) the adjusted basis of any intragroup stock, and
 (ii) the earnings and profits of any member of such group,
 to the extent necessary to carry out the purposes of this
 section.
 (B) Definitions
 For purposes of this paragraph -
 (i) Affiliated group
 The term ''affiliated group'' has the meaning given such
 term by section 1504(a).
 (ii) Intragroup stock
 The term ''intragroup stock'' means any stock which -
 (I) is in a corporation which is a member of an
  affiliated group, and
 (II) is held by another member of such group.
 (5) Acquisitions by foreign corporations
 (A) In general
 In the case of any acquisition to which subsection (a)
 applies in which the acquiring corporation is a foreign
 corporation, the only earnings and profits taken into account
 under paragraph (2)(A) shall be those earnings and profits -
 (i) which are attributable (under regulations prescribed by
 the Secretary) to stock of the acquiring corporation owned
 (within the meaning of section 958(a)) by a corporation or
 individual which is -
 (I) a United States shareholder (within the meaning of
 section 951(b)) of the acquiring corporation, and
 (II) the transferor or a person who bears a relationship
 to the transferor described in section 267(b) or 707(b),
 and
 (ii) which were accumulated during the period or periods
  such stock was owned by such person while the acquiring
 corporation was a controlled foreign corporation.
 (B) Regulations
 The Secretary shall prescribe such regulations as are
 appropriate to carry out the purposes of this paragraph.
 (6) Avoidance of multiple inclusions, etc.
 In the case of any acquisition to which subsection (a) applies
 in which the acquiring corporation or the issuing corporation is
 a foreign corporation, the Secretary shall prescribe such
 regulations as are appropriate in order to eliminate a multiple
 inclusion of any item in income by reason of this subpart and to
 provide appropriate basis adjustments (including modifications to
 the application of sections 959 and 961).
 (c) Control
 (1) In general
 For purposes of this section, control means the ownership of
 stock possessing at least 50 percent of the total combined voting
 power of all classes of stock entitled to vote, or at least 50
 percent of the total value of shares of all classes of stock. If
 a person (or persons) is in control (within the meaning of the
 preceding sentence) of a corporation which in turn owns at least
 50 percent of the total combined voting power of all stock
 entitled to vote of another corporation, or owns at least 50
 percent of the total value of the shares of all classes of stock
 of another corporation, then such person (or persons) shall be
 treated as in control of such other corporation.
 (2) Stock acquired in the transaction
 For purposes of subsection (a)(1) -
 (A) General rule
 Where 1 or more persons in control of the issuing corporation
 transfer stock of such corporation in exchange for stock of the
 acquiring corporation, the stock of the acquiring corporation
 received shall be taken into account in determining whether
 such person or persons are in control of the acquiring
 corporation.
 (B) Definition of control group
 Where 2 or more persons in control of the issuing corporation
 transfer stock of such corporation to the acquiring corporation
 and, after the transfer, the transferors are in control of the
 acquiring corporation, the person or persons in control of each
 corporation shall include each of the persons who so transfer
 stock.
 (3) Constructive ownership
 (A) In general
 Section 318(a) (relating to constructive ownership of stock)
 shall apply for purposes of determining control under this
 section.
 (B) Modification of 50-percent limitations in section 318
 For purposes of subparagraph (A) -
  (i) paragraph (2)(C) of section 318(a) shall be applied by
 substituting ''5 percent'' for ''50 percent'', and
 (ii) paragraph (3)(C) of section 318(a) shall be applied -
 (I) by substituting ''5 percent'' for ''50 percent'', and
 (II) in any case where such paragraph would not apply but
 for subclause (I), by considering a corporation as owning
 the stock (other than stock in such corporation) owned by
 or for any shareholder of such corporation in that
 proportion which the value of the stock which such
 shareholder owned in such corporation bears to the value of
 all stock in such corporation.