In order to prevent the distribution of corporate income in the form of preferred stock which, upon sale by the distributee, would otherwise qualify for capital gains treatment, section 306 of the Internal Revenue Code provides that all such stock is tainted at the time of distribution, and that any gain upon sale is taxed as ordinary income. The author suggests a method by which such taint can be removed, and income received upon sale taxed at capital gain rates. This method entails putting the 306 stock in a trust along with potentially appreciable property. When the trust sells the subsequently appreciated property and realizes a capital gain, it makes a distribution in kind of the 306 stock. As such, the stock's basis in the hands of the beneficiary is determined by reference to its fair market value, and the taint is thus purged.
J. A. Schnepper,
The Schnepper Trust: Eliminating the Section 306 Taint,
31 U. Miami L. Rev.
Available at: http://repository.law.miami.edu/umlr/vol31/iss1/5