Section 306 of the IRC was enacted by Congress to prevent tax
avoidance by distributing certain stock to a shareholder in a nontaxable
stock dividend. Section 306 prevents shareholders from using a
preferred stock bailout to convert ordinary income into a capital gain.
Analyze the key provisions of Section 306 of the IRC, and outline a tax-
planning strategy geared toward redeeming preferred stock with sale or
exchange treatment as an alternative to Section 306.
From your analysis of Section 306 in the e-Activity, differentiate
between the tax treatment of earnings and profit on the distributing
corporation of both a sale of Section 306 stock and redemption of
Section 306 stock. Suggest the most important reasons for this
differentiation in tax treatment.