Sec. 305. Distributions of stock and stock rights
 
 (a) General rule
 Except as otherwise provided in this section, gross income does
 not include the amount of any distribution of the stock of a
 corporation made by such corporation to its shareholders with
 respect to its stock.
 (b) Exceptions
 Subsection (a) shall not apply to a distribution by a corporation
 of its stock, and the distribution shall be treated as a
 distribution of property to which section 301 applies -
 (1) Distributions in lieu of money
 If the distribution is, at the election of any of the
 shareholders (whether exercised before or after the declaration
 thereof), payable either -
 (A) in its stock, or
 (B) in property.
 (2) Disproportionate distributions
 If the distribution (or a series of distributions of which such
 distribution is one) has the result of -
 (A) the receipt of property by some shareholders, and
 (B) an increase in the proportionate interests of other
 shareholders in the assets or earnings and profits of the
 corporation.
 (3) Distributions of common and preferred stock
 If the distribution (or a series of distributions of which such
  distribution is one) has the result of -
 (A) the receipt of preferred stock by some common
 shareholders, and
 (B) the receipt of common stock by other common shareholders.
 (4) Distributions on preferred stock
 If the distribution is with respect to preferred stock, other
 than an increase in the conversion ratio of convertible preferred
 stock made solely to take account of a stock dividend or stock
 split with respect to the stock into which such convertible stock
 is convertible.
 (5) Distributions of convertible preferred stock
 If the distribution is of convertible preferred stock, unless
 it is established to the satisfaction of the Secretary that such
 distribution will not have the result described in paragraph (2).
 (c) Certain transactions treated as distributions
 For purposes of this section and section 301, the Secretary shall
 prescribe regulations under which a change in conversion ratio, a
 change in redemption price, a difference between redemption price
 and issue price, a redemption which is treated as a distribution to
 which section 301 applies, or any transaction (including a
 recapitalization) having a similar effect on the interest of any
 shareholder shall be treated as a distribution with respect to any
 shareholder whose proportionate interest in the earnings and
 profits or assets of the corporation is increased by such change,
 difference, redemption, or similar transaction. Regulations
 prescribed under the preceding sentence shall provide that -
 (1) where the issuer of stock is required to redeem the stock
 at a specified time or the holder of stock has the option to
 require the issuer to redeem the stock, a redemption premium
 resulting from such requirement or option shall be treated as
 reasonable only if the amount of such premium does not exceed the
 amount determined under the principles of section 1273(a)(3),
 (2) a redemption premium shall not fail to be treated as a
 distribution (or series of distributions) merely because the
 stock is callable, and
 (3) in any case in which a redemption premium is treated as a
 distribution (or series of distributions), such premium shall be
 taken into account under principles similar to the principles of
 section 1272(a).
 (d) Definitions
 (1) Rights to acquire stock
 For purposes of this section, the term ''stock'' includes
 rights to acquire such stock.
 (2) Shareholders
 For purposes of subsections (b) and (c), the term
 ''shareholder'' includes a holder of rights or of convertible
 securities.
 (e) Treatment of purchaser of stripped preferred stock
 (1) In general
 If any person purchases after April 30, 1993, any stripped
 preferred stock, then such person, while holding such stock,
 shall include in gross income amounts equal to the amounts which
 would have been so includible if such stripped preferred stock
 were a bond issued on the purchase date and having original issue
 discount equal to the excess, if any, of -
 (A) the redemption price for such stock, over
 (B) the price at which such person purchased such stock.
 The preceding sentence shall also apply in the case of any person
 whose basis in such stock is determined by reference to the basis
 in the hands of such purchaser.
 (2) Basis adjustments
  Appropriate adjustments to basis shall be made for amounts
 includible in gross income under paragraph (1).
 (3) Tax treatment of person stripping stock
 If any person strips the rights to 1 or more dividends from any
 stock described in paragraph (5)(B) and after April 30, 1993,
 disposes of such dividend rights, for purposes of paragraph (1),
 such person shall be treated as having purchased the stripped
 preferred stock on the date of such disposition for a purchase
 price equal to such person's adjusted basis in such stripped
 preferred stock.
 (4) Amounts treated as ordinary income
 Any amount included in gross income under paragraph (1) shall
 be treated as ordinary income.
 (5) Stripped preferred stock
 For purposes of this subsection -
 (A) In general
 The term ''stripped preferred stock'' means any stock
 described in subparagraph (B) if there has been a separation in
 ownership between such stock and any dividend on such stock
 which has not become payable.
 (B) Description of stock
 Stock is described in this subsection if such stock -
 (i) is limited and preferred as to dividends and does not
 participate in corporate growth to any significant extent,
 and
 (ii) has a fixed redemption price.
 (6) Purchase
 For purposes of this subsection, the term ''purchase'' means -
 (A) any acquisition of stock, where
  (B) the basis of such stock is not determined in whole or in
 part by the reference to the adjusted basis of such stock in
 the hands of the person from whom acquired.
 (7) Cross reference.--
 For treatment of stripped interests in certain 
 accounts or entities holding preferred stock, see 
 section 1286(f).
 
 (f) Cross references
 For special rules -
 (1) Relating to the receipt of stock and stock rights in
  corporate organizations and reorganizations, see part III (sec.
 351 and following).
 (2) In the case of a distribution which results in a gift,
 see section 2501 and following.
 (3) In the case of a distribution which has the effect of the
 payment of compensation, see section 61(a)(1).