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
      (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
    (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,
            (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).