[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: 26CFR1.306-2]

[Page 43-44]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.306-2  Exception.

    (a) If a shareholder terminates his entire stock interest in a 
corporation--
    (1) By a sale or other disposition within the requirements of 
section 306(b)(1)(A), or
    (2) By redemption under section 302(b)(3) (through the application 
of section 306(b)(1)(B)),

the amount received from such disposition shall be treated as an amount 
received in part or full payment for the stock sold or redeemed. In the 
case of a sale, only the stock interest need be terminated. In 
determining whether an entire stock interest has been terminated under 
section 306(b)(1)(A), all of the provisions of section 318(a) (relating 
to constructive ownership of stock) shall be applicable. In determining 
whether a shareholder has terminated his entire interest in a 
corporation by a redemption of his stock under section 302(b)(3), all of 
the provisions of section 318(a) shall be applicable unless the 
shareholder meets the requirements of section 302(c)(2) (relating to 
termination of all interest in the corporation). If the requirements of 
section 302(c)(2) are met, section 318(a)(1) (relating to members of a 
family) shall be inapplicable. Under all circumstances paragraphs (2), 
(3), (4), and (5) of section 318(a) shall be applicable.
    (b) Section 306(a) does not apply to--
    (1) Redemptions of section 306 stock pursuant to a partial or 
complete liquidation of a corporation to which part II (section 331 and 
following), subchapter C, chapter 1 of the Code applies,
    (2) Exchanges of section 306 stock solely for stock in connection 
with a reorganization or in an exchange under

[[Page 44]]

section 351, 355, or section 1036 (relating to exchanges of stock for 
stock in the same corporation) to the extent that gain or loss is not 
recognized to the shareholder as the result of the exchange of the stock 
(see paragraph (d) of Sec. 1.306-3 relative to the receipt of other 
property), and
    (3) A disposition or redemption, if it is established to the 
satisfaction of the Commissioner that the distribution, and the 
disposition or redemption, was not in pursuance of a plan having as one 
of its principal purposes the avoidance of Federal income tax. However, 
in the case of a prior or simultaneous disposition (or redemption) of 
the stock with respect to which the section 306 stock disposed of (or 
redeemed) was issued, it is not necessary to establish that the 
distribution was not in pursuance of such a plan. For example, in the 
absence of such a plan and of any other facts the first sentence of this 
subparagraph would be applicable to the case of dividends and isolated 
dispositions of section 306 stock by minority shareholders. Similarly, 
in the absence of such a plan and of any other facts, if a shareholder 
received a distribution of 100 shares of section 306 stock on his 
holdings of 100 shares of voting common stock in a corporation and sells 
his voting common stock before he disposes of his section 306 stock, the 
subsequent disposition of his section 306 stock would not ordinarily be 
considered a disposition one of the principal purposes of which is the 
avoidance of Federal income tax.

[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6969, 33 FR 
11998, Aug. 23, 1968]