STOCK DIVIDENDS.

SEC. 421. STOCK DIVIDENDS. (a) In General.—Section 305 (relating to distributions of stock and stock rights) is amended to read as follows: “SEC. 305. DISTRIBUTIONS OF STOCK AND STOCK RIGHTS. “(a) General Rule.—Except as otherwise provided in this section gross income does not include the amount of any distribution of the stock of a corporation made by such corporation to its shareholders with respect to its stock. “(b) Exceptions.—Subsection (a) shall not apply to a distribution a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies— “(1) Distributions in lieu of money.—If the distribution is, at the election of any of the shareholders (whether exercised before or after the declaration thereof), payable either— “(A) in its stock, or “(B) in property. “(2) Disproportionate distributions.—If the distribution (or a series of distributions of which such distribution is one) has the result of— “(A) the receipt of property by some shareholders, and “(B) an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation. “(3) Distributions of common and preferred stock.—If the distribution (or a series of distributions of which such distribution is one) has the result of— “(A) the receipt of preferred stock by some common shareholders, and “(B) the receipt of common stock by other common shareholders. “(4) Distributions on preferred stock.—If the distribution is with respect to preferred stock, other than an increase in the conversion ratio of convertible preferred stock made solely to take account of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible. “(5) Distributions of convertible preferred stock.—If the distribution is of convertible preferred stock, unless it is established to the satisfaction of the Secretary or his delegate that such distribution will not have the result described in paragraph (2). “(c) Certain Transactions Treated as Distributions.—For purposes of this section and section 301, the Secretary or his delegate shall prescribe regulations under which a change in conversion ratio, 83 Stat. 615 a change in redemption price, a difference between redemption price and issue price, a redemption which is treated as a distribution to which section 301 applies, or any transaction (including a recapitalization) having a similar effect on the interest of any shareholder shall be treated as a distribution with respect to any shareholder whose proportionate interest in the earnings and profits or assets of the corporation is increased by such change, difference, redemption, or similar transaction. “(d) Definitions.— “(1) Eights to acquire stock.—For purposes of this section, the term ‘stock’ includes rights to acquire such stock. “(2) Shareholders.—For purposes of subsections (b) and (c), the term ‘shareholder’ includes a holder of rights or of convertible securities. “(e) Cross References.— “For special rules— “(1) Relating to the receipt of stock and stock rights in corporate organizations and reorganizations, see part III (sec. 351 and following). “(2) In the case of a distribution which results in a gift, see section 2501 and following. “(3) In the case of a distribution which has the effect of the payment of compensation, see section 61(a)(1).” (b) Effective Dates.— (1) Except as otherwise provided in this subsection, the amendment made by subsection (a) shall apply with respect to distributions (or deemed distributions) made after January 10, 1969, in taxable years ending after such date. (2) (A) Section 305(b)(2) of the Internal Revenue Code of 1954 (as added by subsection (a)) shall not apply to a distribution (or deemed distribution) of stock made before January 1, 1991, with respect to stock (i) outstanding on January 10, 1969, (ii) issued pursuant to a contract binding on January 10, 1969, on the distributing corporation, (iii) which is additional stock of that class of stock which (as of January 10, 1969) had the largest fair market value of all classes of stock of the corporation (taking into account only stock outstanding on January 10, 1969, or issued pursuant to a contract binding on January 10, 1969), (iv) described in subparagraph (C)(iii), or (v) issued in a prior distribution described in clause (i), (ii), (iii), or (iv). (B) Subparagraph (A) shall apply only if— (i) the stock as to which there is a receipt of property was outstanding on January 10, 1969 (or was issued pursuant to a contract binding on January 10, 1969, on the distributing corporation), and (ii) if such stock and any stock described in subparagraph (A)(i) were also outstanding on January 10, 1968, a distribution of property was made on or before January 10, 1969, with respect to such stock, and a distribution of stock was made on or before January 10, 1969, with respect to such stock described in subparagraph (A)(i). (C) Subparagraph (A) shall cease to apply when at any time after October 9, 1969, the distributing corporation issues any of its stock (other than in a distribution of stock with respect to stock of the same class) which is not— (i) nonconvertible preferred stock, (ii) additional stock of that class of stock which meets the requirements of subparagraph (A)(iii), or 83 Stat. 616 (iii) preferred stock which is convertible into stock which meets the requirements of subparagraph (A)(iii) at a fixed conversion ratio which takes account of all stock dividends and stock splits with respect to the stock into which such convertible stock is convertible. (D) For purposes of this paragraph, the term “stock” includes rights to acquire such stock. (3) In cases to which Treasury Decision 6990 (promulgated January 10, 1969) would not have applied, in applying paragraphs (1) and (2) April 22, 1969, shall be substituted for January 10, 1969. (4) Section 305(b)(4) of the Internal Revenue Code of 1954 (as added by subsection (a)) shall not apply to any distribution (or deemed distribution) with respect to preferred stock (including any increase in the conversion ratio of convertible stock) made before January 1, 1991, pursuant to the terms relating to the issuance of such stock which were in effect on January 10, 1969. (5) With respect to distributions made or considered as made after January 10, 1969, in taxable years ending after such date to the extent that the amendment made by subsection (a) does not apply by reason of paragraph (2), (3), or (4) of this subsection, section 305 of the Internal Revenue Code of 1954 (as in effect before the amendment made by subsection (a)) shall continue to apply.