Code Section 304: A Roadmap, An Updated Analysis, and Policy Considerations
34 Pages Posted: 7 Aug 2022 Last revised: 6 May 2025
Date Written: July 1, 2022
Abstract
Code Section 304 requires the reclassification of stock sales between affiliated corporations as dividends. However, for many years, Code Section 304 has not fulfilled the original “anti-avoidance” tax policy that was behind its legislation. This article aims to provide an updated analysis and explanation of the mechanics of Code Section 304 and to provide some insight into the tax planning strategies that utilize Code Section 304 in order to minimize U.S. federal income tax. The article will also demonstrate how these tax avoidance results are still effective post-TCJA. The article will then suggest a potential tax law change to return this code section to its intended anti-abuse status. Finally, the article suggests reconsideration of the tax policy related to dividend distributions.
Keywords: Corporate Tax, International Tax, Tax Policy, TCJA, Code Section 304, Affiliated Corporations, Tax Planning
JEL Classification: K34
Suggested Citation: Suggested Citation