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sales as redemptions. The parties disagree, however, as to
whether the redemptions must be taxed as distributions in
exchange for stock under section 302(a) or as distributions of
property under section 301.
Before section 304 was enacted, a parent corporation could
extract earnings from its related corporations while avoiding
ordinary dividend treatment by selling the stock of one of its
controlled corporations to another of its controlled
corporations. See, e.g., Wanamaker Trust v. Commissioner, 11
T.C. 365 (1948), affd. per curiam 178 F.2d 10 (3d Cir. 1949). In
1950, section 304 was enacted to prevent the bailout of corporate
earnings and profits through sales involving subsidiary
corporations. See Revenue Act of 1950, ch. 994, 64 Stat.906; see
also H. Rept. 2319, 81st Cong., 2d Sess. (1950), 1950-2 C.B. 380,
420; S. Rept. 2375, 81st Cong., 2d Sess. (1950), 1950-2 C.B. 483,
514. In 1954, section 304 was amended to prevent the bailout of
corporate earnings and profits using brother-sister corporations.
See H. Rept. 1337, 83d Cong., 2d Sess. A79 (1954); S. Rept. 1622,
83d Cong., 2d Sess. 239 (1954). This antibailout provision
provides the analytical framework for both parties’ arguments in
this case.
The pertinent part of section 304(a)(1) provides that, for
purposes of section 302, if one or more persons are in control of
each of two corporations, and in return for property, one of the
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