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to determination of sources of income), be treated as derived from the same source as would have been the source if money had been received from the corporation as a dividend a t the time of the distribution of such stock. If under the preceding sentence such amount is determined to be derived from sources within the United States, such amount shall be considered to be fixed or determinable annual or periodical gains, profits, and income within the meaning of section 871 (a) or section 881(a), as the case may be. (g) CHANGE I N T E R M S AN-D CONDITIONS OF STOCK.—If a substan-

tial change is made in the terms and conditions of any stock, then, for purposes of this section— (1) the fair market value of such stock shall be the fair market value a t the time of the distribution or a t the time of such change, whichever such value is higher; (2) such stock's ratable share of the amount which would have been a dividend if money had been distributed in lieu of stock shall be determined as of the time of distribution or as of the time of such change, whichever such ratable share is higher; and (3) subsection (c)(2) shall not apply unless the stock meets the requirements of such subsection both at the time of such distribution and a t the time of such change. (h) STOCK RECEIVED I N DISTRIBUTIONS AND REORGANIZATIONS TO W H I C H 1939 CODE APPLIED.—-If stock—

(1) was received in a distribution or reorganization to which the Internal Revenue Code of 1939 (or the corresponding provisions of prior law) applied, (2) such stock would have been section 306 stock if this Code applied to such distribution or reorganization, and (3) such stock is disposed of or redeemed on or after June 22, 1954, then the foregoing subsections of this section shall not apply in respect of such disposition or redemption. The extent to which such disposition or redemption shall be treated as a dividend shall be determined as if the Internal Revenue Code of 1939 (as modified by the provisions of this Code other than the foregoing subsections of this section) continued to apply in respect of such disposition or redemption. SEC. 307. BASIS OF STOCK AND STOCK RIGHTS ACQUIRED IN DISTRIBUTIONS. (a) GENERAL RULE. — I f a shareholder in a corporation receives

its stock or rights to acquire its stock (referred to in this subsection as "new stock") in a distribution to which section 305(a) applies, then the basis of such new stock and of the stock with respect to which it is distributed (referred to in this section as "old stock"), respectively, shall, in the shareholder's hands, be determined by allocating between the old stock and the new stock the adjusted basis of the old stock. Such allocation shall be made under regulations prescribed by the Secretary or his delegate. (b) EXCEPTION FOR CERTAIN STOCK RIGHTS.—• (1) IN GENERAL.—If—

(A) a corporation distributes rights to acquire its stock to a shareholder in a distribution to which section 305(a) applies, and § 307(b)(1)(A)

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