26 U.S.C. § 301 — Distributions of property

(a) In general: Except as this chapter otherwise provides, when a corporation distributes property (as section 317(a) defines "property") to a shareholder because of the shareholder's stock, the distribution is taxed the way subsection (c) describes. (b) Amount distributed: (1) The amount of a distribution is the money received, plus the fair market value of any other property received. (2) That amount is reduced, but never below zero, by (A) any corporate liability the shareholder takes on as part of the distribution, and (B) any liability attached to the property, both immediately before and immediately after the distribution. (3) Fair market value is measured as of the date of the distribution. (c) Amount taxable: (1) The part of the distribution that is a "dividend," as section 316 defines it, is included in the shareholder's gross income. (2) The part that is not a dividend is applied against, and reduces, the shareholder's adjusted basis in the stock. (3)(A) If the non-dividend part is larger than the stock's adjusted basis, the excess is treated as gain from selling or exchanging property — (B) except that any part of that excess coming from an increase in value that built up before March 1, 1913, is exempt from tax. (d) Basis: The basis of property a shareholder receives in this kind of distribution is the property's fair market value. (e) Special rule for a 20-percent corporate shareholder: (1) Except as regulations otherwise provide, solely for figuring the taxable income (and stock basis) of a "20 percent corporate shareholder," section 312 is applied to the distributing corporation as if it did not include subsections (k) and (n). (2) A "20 percent corporate shareholder" is any corporation that owns, directly or through section 318's attribution rules, either (A) stock giving it at least 20 percent of the total combined voting power of the distributing corporation's voting stock, or (B) at least 20 percent of the distributing corporation's total stock value (not counting limited, preferred, nonvoting stock) — but only if, without this special rule, the shareholder corporation would otherwise qualify for a deduction under section 243 or 245 for the distribution. (3) The reference to subsection (n) of section 312 in paragraph (1) does not include paragraph (7) of that subsection. (4) The Secretary of the Treasury may issue whatever regulations are necessary or appropriate to carry out this special rule. (f) Special rules (cross-references): (1) Distributions that redeem stock are instead covered by section 302. (2) Distributions in a complete liquidation are covered by Part II (section 331 and following). (3) Distributions in corporate organizations and reorganizations are covered by Part III (section 351 and following). (4) Rules on taxing dividends individuals receive at capital-gain rates are in section 1(h)(11).