Acquisition Indebtedness Exception in Related Redemptions

§ 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 subsidiaryFor 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 dividendIn 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 redemptionExcept 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).