[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.302-1]

[Page 13-14]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.302-1  General.

    (a) Under section 302(d), unless otherwise provided in subchapter C, 
chapter

[[Page 14]]

1 of the Code, a distribution in redemption of stock shall be treated as 
a distribution of property to which section 301 applies if the 
distribution is not within any of the provisions of section 302(b). A 
distribution in redemption of stock shall be considered a distribution 
in part or full payment in exchange for the stock under section 302(a) 
provided paragraph (1), (2), (3), or (4) of section 302(b) applies. 
Section 318(a) (relating to constructive ownership of stock) applies to 
all redemptions under section 302 except that in the termination of a 
shareholder's interest certain limitations are placed on the application 
of section 318(a)(1) by section 302(c)(2). The term redemption of stock 
is defined in section 317(b). Section 302 does not apply to that portion 
of any distribution which qualifies as a distribution in partial 
liquidation under section 346. For special rules relating to redemption 
of stock to pay death taxes see section 303. For special rules relating 
to redemption of section 306 stock see section 306. For special rules 
relating to redemption of stock in partial or complete liquidation see 
section 331.
    (b) If, in connection with a partial liquidation under the terms of 
section 346, stock is redeemed in an amount in excess of the amount 
specified by section 331(a)(2), section 302(b) shall first apply as to 
each shareholder to which it is applicable without limitation because of 
section 331(a)(2). That portion of the total distribution which is used 
in all redemptions from specific shareholders which are within the terms 
of section 302(a) shall be excluded in determining the application of 
sections 346 and 331(a)(2). For example, Corporation X has $50,000 which 
is attributable to the sale of one of two active businesses and which, 
if distributed in redemption of stock, would qualify as a partial 
liquidation under the terms of section 346(b). Corporation X distributes 
$60,000 to its shareholders in redemption of stock, $20,000 of which is 
in redemption of all of the stock of shareholder A within the meaning of 
section 302(b)(3). The $20,000 distributed in redemption of the stock of 
shareholder A will be excluded in determining the application of 
sections 346 and 331(a)(2). The entire $60,000 will be treated as in 
part or full payment for stock ($20,000 qualifying under section 302(a) 
and $40,000 qualifying under sections 346 and 331(a)(2)).