[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: 26CFR1.305-1]

[Page 23-24]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.305-1  Stock dividends.

    (a) In general. Under section 305, a distribution made by a 
corporation to its shareholders in its stock or in rights to acquire its 
stock is not included in gross income except as provided in section 
305(b) and the regulations promulgated under the authority of section 
305(c). A distribution made by a corporation to its shareholders in its 
stock or rights to acquire its stock which would not otherwise be 
included in gross income by reason of section 305 shall not be so 
included merely because such distribution was made out of Treasury stock 
or consisted of rights to acquire Treasury stock. See section 307 for 
rules as to basis of stock and stock rights acquired in a distribution.
    (b) Amount of distribution. (1) In general, where a distribution of 
stock or rights to acquire stock of a corporation is treated as a 
distribution of property to which section 301 applies by reason of 
section 305(b), the amount of the distribution, in accordance with 
section 301(b) and Sec. 1.301-1, is the fair market value of such stock 
or rights on the date of distribution. See Example (1) of Sec. 1.305-
2(b).
    (2) Where a corporation which regularly distributes its earnings and 
profits, such as a regulated investment company, declares a dividend 
pursuant to which the shareholders may elect to receive either money or 
stock of the distributing corporation of equivalent value, the amount of 
the distribution of the stock received by any shareholder electing to 
receive stock will be

[[Page 24]]

considered to equal the amount of the money which could have been 
received instead. See Example (2) of Sec. 1.305-2(b).
    (3) For rules for determining the amount of the distribution where 
certain transactions, such as changes in conversion ratios or periodic 
redemptions, are treated as distributions under section 305(c), see 
Examples (6), (8), (9), and (15) of Sec. 1.305-3(e).
    (c) Adjustment in purchase price. A transfer of stock (or rights to 
acquire stock) or an increase or decrease in the conversion ratio or 
redemption price of stock which represents an adjustment of the price to 
be paid by the distributing corporation in acquiring property (within 
the meaning of section 317(a)) is not within the purview of section 305 
because it is not a distribution with respect to its stock. For example, 
assume that on January 1, 1970, pursuant to a reorganization, 
corporation X acquires all the stock of corporation Y solely in exchange 
for its convertible preferred class B stock. Under the terms of the 
class B stock, its conversion ratio is to be adjusted in 1976 under a 
formula based upon the earnings of corporation Y over the 6-year period 
ending on December 31, 1975. Such an adjustment in 1976 is not covered 
by section 305.
    (d) Definitions. (1) For purposes of this section and Sec. Sec. 
1.305-2 through 1.305-7, the term stock includes rights or warrants to 
acquire such stock.
    (2) For purposes of Sec. Sec. 1.305-2 through 1.305-7, the term 
shareholder includes a holder of rights or warrants or a holder of 
convertible securities.

[T.D. 7281, 38 FR 18532, July 12, 1973; 38 FR 19910, July 25, 1973]