Federal Tax

Stock Sales Subject to Section 304 (Portfolio 768)

  • This Portfolio discusses the tax rules governing the sale of stock of a parent corporation to its subsidiary and of stock of one corporation to a sister corporation.


Bloomberg Tax Portfolio, Stock Sales Subject to Section 304, No. 768, discusses the tax rules governing a stock sale where: (1) a person sells stock of a parent corporation to its subsidiary (a “parent-subsidiary” stock purchase), and (2) a person controls each of two corporations and sells stock of one corporation to the other corporation (a “brother-sister” stock purchase). Section 304 governs these transactions and treats them as stock redemptions, not as stock sales to third persons, thus bringing into play the redemption provisions, the most important of which is §302.

Congress originally enacted §304 (and its statutory predecessor) to prevent the bailout of corporate earnings and profits as capital gain or return of capital via a sale of stock of one corporation to a related corporation, thereby avoiding the ordinary income tax on dividends. When capital gains are taxed at preferential rates, many individual taxpayers structure transactions to avoid the grasp of §304 in order to obtain the preferential rate for capital gains; even when the rates on capital gains and dividends are the same, the basis offset allowed for sales and exchanges motivates taxpayers to avoid dividend treatment. However, for many corporate taxpayers (especially in the international arena) §304 may be used to generate tax benefits in the context of stock sales (e.g., the §243 dividends received deduction and the §902 deemed-paid tax credit).

This Portfolio examines the judicial and legislative background of §304 and provides a detailed discussion of the rules of §304. As a part of this discussion, the separate rules applicable to parent-subsidiary and brother-sister stock purchases are compared, and the interrelation of §304 with other sections of the Code is explored.

Table of Contents

I. Introduction
II. Parent-Subsidiary Stock Sales
III. Brother-Sister Stock Sales

Arsalan Hamidi
Manager | Mergers & Acquisitions – Tax
George Koutouras
CEO and Founder
LumiNational LLC
Lindsey M. Dowling
Lindsey M. Dowling
Alvarez & Marsal Tax and LLC
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