Frequently Asked Questions
Who is eligible for the Section 306 Stock Tax Avoidance Exception?
Requires establishing to the satisfaction of the Secretary that the transaction was not in pursuance of a plan having tax avoidance as a principal purpose.
How does the Section 306 Stock Tax Avoidance Exception work?
Avoids ordinary income treatment on the disposition of Section 306 (preferred) stock if the taxpayer can prove the distribution and disposition were not part of a tax avoidance plan.
What law authorizes the Section 306 Stock Tax Avoidance Exception?
The Section 306 Stock Tax Avoidance Exception is authorized under IRC §306(b)(4) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §306
Source: Internal Revenue Code, Title 26, United States Code
§ 306. Dispositions of certain stock(a) General ruleIf a shareholder sells or otherwise disposes of section 306 stock (as defined in subsection (c))—(1) Dispositions other than redemptionsIf such disposition is not a redemption (within the meaning of section 317(b))—(A) The amount realized shall be treated as ordinary income. This subparagraph shall not apply to the extent that—(i) the amount realized, exceeds
(ii) such stock’s ratable share of the amount which would have been a dividend at the time of distribution if (in lieu of section 306 stock) the corporation had distributed money in an amount equal to the fair market value of the stock at the time of distribution.
(B) Any excess of the amount realized over the sum of—(i) the amount treated under subparagraph (A) as ordinary income, plus
(ii) the adjusted basis of the stock,
shall be treated as gain from the sale of such stock.
(C) No loss shall be recognized.
(D) Treatment as dividend.—For purposes of section 1(h)(11) and such other provisions as the Secretary may specify, any amount treated as ordinary income under this paragraph shall be treated as a dividend received from the corporation.
(2) RedemptionIf the disposition is a redemption, the amount realized shall be treated as a distribution of property to which section 301 applies.
(b) ExceptionsSubsection (a) shall not apply—(1) Termination of shareholder’s interest, etc.(A) Not in redemptionIf the disposition—(i) is not a redemption;
(ii) is not, directly or indirectly, to a person the ownership of whose stock would (under section 318(a)) be attributable to the shareholder; and
(iii) terminates the entire stock interest of the shareholder in the corporation (and for purposes of this clause, section 318(a) shall apply).
(B) In redemptionIf the disposition is a redemption and paragraph (3) or (4) of section 302(b) applies.
(2) LiquidationsIf the section 306 stock is redeemed in a distribution in complete liquidation to which part II (sec. 331 and following) applies.
(3) Where gain or loss is not recognizedTo the extent that, under any provision of this subtitle, gain or loss to the shareholder is not recognized with respect to the disposition of the section 306 stock.
(4) Transactions not in avoidanceIf it is established to the satisfaction of the Secretary—(A) that the distribution, and the disposition or redemption, or
(B) in the case of a prior or simultaneous disposition (or redemption) of the stock with respect to which the section 306 stock disposed of (or redeemed) was issued, that the disposition (or redemption) of the section 306 stock,
was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax.
Showing first 3,000 characters of full section text.