[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: 26CFR1.305-4]

[Page 32]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.305-4  Distributions of common and preferred stock.

    (a) In general. Under section 305(b)(3), a distribution (or a series 
of distributions) by a corporation which results in the receipt of 
preferred stock whether or not convertible into common stock) by some 
common shareholders and the receipt of common stock by other common 
shareholders is treated as a distribution of property to which section 
301 applies. For the meaning of the term a series of distribution, see 
subparagraphs (1) through (6) of Sec. 1.305-3(b).
    (b) Examples. The application of section 305(b)(3) may be 
illustrated by the following examples:

    Example (1). Corporation X is organized with two classes of common 
stock, class A and class B. Dividends may be paid in stock or in cash on 
either class of stock without regard to the medium of payment of 
dividends on the other class. A dividend is declared on the class A 
stock payable in additional shares of class A stock and a dividend is 
declared on class B stock payable in newly authorized class C stock 
which is nonconvertible and limited and preferred as to dividends. Both 
the distribution of class A shares and the distribution of new class C 
shares are distributions to which section 301 applies.
    Example (2). Corporation Y is organized with one class of stock, 
class A common. During the year the corporation declares a dividend on 
the class A stock payable in newly authorized class B preferred stock 
which is convertible into class A stock no later than 6 months from the 
date of distribution at a price that is only slightly higher than the 
market price of class A stock on the date of distribution. Taking into 
account the dividend rate, redemption provisions, the marketability of 
the convertible stock, and the conversion price, it is reasonable to 
anticipate that within a relatively short period of time some 
shareholders will exercise their conversion rights and some will not. 
Since the distribution can reasonably be expected to result in the 
receipt of preferred stock by some common shareholders and the receipt 
of common stock by other common shareholders, the distribution is a 
distribution of property to which section 301 applies.

[T.D. 7281, 38 FR 18536, July 12, 1973]