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INTERNAL REVENUE CODE OF 1964 (A) DISTRIBUTED TO SELLER.^—Stock (other than common stock issued with respect to common stock) which was distributed to the shareholder selhng or otherwise disposing of such stock if, by reason of section 305(a), any part of such distribution was not includible in the gross income of the shareholder. (B)
R E C E IV E D IN A CORPORATE REORGANIZATION OR SEPARA-
TION.—Stock which is not common stock and— (i) which was received, by the shareholder selling or otherwise disposing of such stock, in pursuance of a plan of reorganization (within the meaning of section 368(a)), or in a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applied, and (ii) with respect to the receipt of which gain or loss to the shareholder was to any extent not recognized by reason of part III, but only to the extent that either the effect of the transaction was substantially the same as the receipt of a stock dividend, or the stock was received in exchange for section 306 stock. For purposes of this section, a receipt of stock to which the foregoing provisions of this subparagraph apply shall be treated as a distribution of stock. (C)
STOCK HAVING TRANSFERRED OR SUBSTITUTED BASIS.—•
Except as otherwise provided in subparagraph (B), stock the basis of which (in the hands of the shareholder selling or otherwise disposing of such stock) is determined by reference to the basis (in the hands of such shareholder or any other person) of section 306 stock. (2) EXCEPTION WHERE NO EARNINGS AND PROFITS.^—For purposes of this section, the term "section 306 stock" does not include any stock no part of the distribution of which would have been adividend at the time of the distribution if money had been distributed in lieu of the stock. (d) STOCK R I G H T S. — For purposes of this section— (1) stock rights shall be treated as stock, and (2) stock acquired through the exercise of stock rights shall be treated as stock distributed at the time of the distribution of the stock rights, to the extent of the fair market value of such rights at the time of the distribution. (e) CONVERTIBLE STOCK.^—For purposes of subsection (c)— (1) if section 306 stock was issued with respect to common stock and later such section 306 stock is exchanged for cominon stock in the same corporation (whether or not such exchange is pursuant to a conversion privilege contained in the section 306 stock), then (except as provided in paragraph (2)) the common stock so received shall not be treated as section 306 stock; and (2) common stock with respect to which there is a privilege of converting into stock other than common stock (or into property), whether or not the conversion privilege is contained in such stock, shall not be treated as common stock. (f) SOURCE OF G A I N. — The amount treated under subsection (a)(1) (A) as gain from the sale of property which is not a capital asset shall, for purposes of part I of subchapter N (sec. 861 and following, relating § 306(c)(1)(A)
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