Par. 3. Section 1.305-3 is amended by: 1. Revising paragraph (e) introductory text, Example (6) (ii), Example (7) (ii) and (iii). 2. Adding paragraph (f). The revisions and addition read as follows:
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(e) Examples. The following examples illustrate the application of section 305(b)(2) to distributions of stock and rights to acquire stock and the application of section 305(c) to deemed distributions of stock and rights to acquire stock. * * *
Example 6.
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(ii) M pays an annual cash dividend on the class A stock. At the beginning of the second year, when the conversion ratio is increased to 1.05 shares of class A stock for each share of class B stock, an applicable adjustment occurs, as defined in § 1.305-7(a), and a distribution of rights to acquire 0.05 shares of class A stock is deemed made under section 305(c) and § 1.305-7(c)(1) with respect to each share of class B stock. The proportionate interests of the class B shareholders in the assets or earnings and profits of M are increased, and the transaction has the effect described in section 305(b)(2). Accordingly, sections 305(b)(2) and 301 apply to the transaction. The amount of the deemed distribution is determined in accordance with § 1.305-7(c)(4)(ii), and the date and time of the deemed distribution are determined in accordance with § 1.305-7(c)(5).
Example 7.
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(ii) In 2017, a $1 cash dividend per share is declared and paid on the class B stock. Pursuant to the terms of the class B stock, on the date of payment, the conversion ratio of the class B stock is reduced. The reduction in conversion ratio is an applicable adjustment, as defined in § 1.305-7(a). Under section 305(c) and § 1.305-7(c)(2), the reduction is a deemed distribution of stock to the class A shareholders, since their proportionate interest in the assets or earnings and profits of the corporation is increased, and the transaction has the effect described in section 305(b)(2). Accordingly, sections 305(b)(2) and 301 apply to the transaction. The amount of the distribution is determined in accordance with § 1.305-7(c)(4)(ii), and the date and time of the deemed distribution are determined in accordance with § 1.305-7(c)(5).
(iii) In the following year a cash dividend is paid on the class A stock but not on the class B stock, and the conversion ratio of the class B stock increases. The increase in the conversion ratio of the class B shares is an applicable adjustment. Under section 305(c) and § 1.305-7(c)(1), the adjustment is a deemed distribution of rights to acquire stock to the class B shareholders since their proportionate interest in the assets or earnings and profits of the corporation is increased, and the transaction has the effect described in section 305(b)(2). Accordingly, sections 305(b)(2) and 301 apply to the transaction. The amount of the distribution is determined in accordance with § 1.305-7(c)(4)(i), and the date and time of the deemed distribution are determined in accordance with § 1.305-7(c)(5).
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(f) Effective/applicability date. The first sentence of paragraph (e) of this section and Examples 6 and 7 of paragraph (e) of this section apply to deemed distributions under section 305(c) occurring on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register . A taxpayer, however, may rely on these proposed regulations for deemed distributions under section 305(c) that occur prior to such date. For purposes of determining the amount of a deemed distribution to a deemed shareholder occurring prior to the date of publication, a taxpayer may determine the amount of the deemed distribution by treating such distribution either as a distribution of a right to acquire stock or as a distribution of the actual stock to which the right relates.