[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: 26CFR1.304-3]

[Page 22]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.304-3  Acquisition by a subsidiary.

    (a) If a subsidiary acquires stock of its parent corporation from a 
shareholder of the parent corporation, the acquisition of such stock 
shall be treated as though the parent corporation had redeemed its own 
stock. For the purpose of this section, a corporation is a parent 
corporation if it meets the 50 percent ownership requirements of section 
304(c). The determination whether the amount received shall be treated 
as an amount received in payment in exchange for the stock shall be made 
by applying section 303, or by applying section 302(b) with reference to 
the stock of the issuing parent corporation. If such distribution would 
have been treated as a distribution of property (pursuant to section 
302(d)) under section 301, the entire amount of the selling price of the 
stock shall be treated as a dividend to the seller to the extent of the 
earnings and profits of the parent corporation determined as if the 
distribution had been made to it of the property that the subsidiary 
exchanged for the stock. In such cases, the transferor's basis for his 
remaining stock in the parent corporation will be determined by 
including the amount of the basis of the stock of the parent corporation 
sold to the subsidiary.
    (b) Section 304(a)(2) may be illustrated by the following example:

    Example. Corporation M has outstanding 100 shares of common stock 
which are owned as follows: B, 75 shares, C, son of B, 20 shares, and D, 
daughter of B, 5 shares. Corporation M owns the stock of Corporation X. 
B sells his 75 shares of Corporation M stock to Corporation X. Under 
section 302(b)(3) this is a termination of B's entire interest in 
Corporation M and the full amount received from the sale of his stock 
will be treated as payment in exchange for this stock, provided he 
fulfills the requirements of section 302(c)(2) (relating to an 
acquisition of an interest in the corporations).