Section 305(b)(2)&(3) Disproportionate Distributions Exception to Section 305(a)

Under the disproportionate distributions exception (Section 305(b)(2)), stock that is distributed to one group of shareholders and cash or other property distributed to another group of shareholders won’t be covered under Section 305(a) and will be taxable.

The next exception is Section 305(b)(3), which says that if some distributions are common stock, and some shareholder get preferred stock, that will be a taxable transaction.  What happens is that the common shareholders end up with a larger percentage of ownership than they had before, so they have been enriched by the distribution, and it will be taxable.

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