Tax-Free Stock Dividends

§ 305. Distributions of stock and stock rights(a) General ruleExcept 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) ExceptionsSubsection (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 moneyIf 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 distributionsIf 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 stockIf 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 stockIf 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 stockIf 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 distributionsFor 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),