Justice Stevens
delivered the opinion of the Court.
This is the third case in which the Government has asked us to decide that a shareholder’s receipt of a cash payment in exchange for a portion of his stock was taxable as a dividend. In the two earlier cases, Commissioner v. Estate of Bedford, 325 U. S. 283 (1945), and United States v. Davis, 397 U. S. 301 (1970), we agreed with the Government largely because the transactions involved redemptions of stock by single corporations that did not “result in a meaningful reduction of the shareholder’s proportionate interest in the corporation.” [729]*729Id., at 313. In the case we decide today, however, the taxpayer 1 in an arm’s-length transaction exchanged his interest in the acquired corporation for less than 1% of the stock of the acquiring corporation and a substantial cash payment. The taxpayer held no interest in the acquiring corporation prior to the reorganization. Viewing the exchange as a whole, we conclude that the cash payment is not appropriately characterized as a dividend. We accordingly agree with the Tax Court and with the Court of Appeals that the taxpayer is entitled to capital gains treatment of the cash payment.
I
In determining tax liability under the Internal Revenue Code of 1954, gain resulting from the sale or exchange of property is generally treated as capital gain, whereas the receipt of cash dividends is treated as ordinary income.2 The Code, however, imposes no current tax on certain stock-for-stock exchanges. In particular, § 354(a)(1) provides, subject to various limitations, for nonrecognition of gain resulting from the exchange of stock or securities solely for other stock or securities, provided that the exchange is pursuant to a plan of corporate reorganization and that the stock or securi[730]*730ties are those of a party to the reorganization.3 26 U. S. C. § 354(a)(1).
Under § 356(a)(1) of the Code, if such a stock-for-stock exchange is accompanied by additional consideration in the form of a cash payment or other property — something that tax practitioners refer to as “boot” — “then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.” 26 u! S. C. §356(a)(1). That is, if the shareholder receives boot, he or she must recognize the gain on the exchange up to the value of the boot. Boot is accordingly generally treated as a gain from the sale or exchange of property and is recognized in the current tax year.
Section 356(a)(2), which controls the decision in this case, creates an exception to that general rule. It provided in 1979:
“If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend, then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after [731]*731February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.” 26 U. S. C. § 356 (a)(2) (1976 ed.).
Thus, if the “exchange . . . has the effect of the distribution of a dividend,” the boot must be treated as a dividend and is therefore appropriately taxed as ordinary income to the extent that gain is realized. In contrast, if the exchange does not have “the effect of the distribution of a dividend,” the boot must be treated as a payment in exchange for property and, insofar as gain is realized, accorded capital gains treatment. The question in this case is thus whether the exchange between the taxpayer and the acquiring corporation had “the effect of the distribution of a dividend” within the meaning of § 356(a)(2).
The relevant facts are easily summarized. For approximately 15 years prior to April 1979, the taxpayer was the president of Basin Surveys, Inc. (Basin). In January 1978, he became sole shareholder in Basin, a company in which he had invested approximately $85,000. The corporation operated a successful business providing various technical services to the petroleum industry. In 1978, N. L. Industries, Inc. (NL), a publicly owned corporation engaged in the manufacture and supply of petroleum equipment and services, initiated negotiations with the taxpayer regarding the possible acquisition of Basin. On April 3, 1979, after months of negotiations, the taxpayer and NL entered into a contract.
The agreement provided for a “triangular merger,” whereby Basin was merged into a wholly owned subsidiary of NL. In exchange for transferring all of the outstanding shares in Basin to NL’s subsidiary, the taxpayer elected to receive 300,000 shares of NL common stock and cash boot of $3,250,000, passing up an alternative offer of 425,000 shares of NL common stock. The 300,000 shares of NL issued to the taxpayer amounted to approximately 0.92% of the out[732]*732standing common shares of NL. If the taxpayer had instead accepted the pure stock-for-stock offer, he would have held approximately 1.3% of the outstanding common shares. The Commissioner and the taxpayer agree that the merger at issue qualifies as a reorganization under §§ 368(a)(1)(A) and (a)(2)(D).4
Respondents filed a joint federal income tax return for 1979. As required by § 356(a)(1), they reported the cash boot as taxable gain. In calculating the tax owed, respondents characterized the payment as long-term capital gain. The Commissioner on audit disagreed with this characterization. In his view, the payment had “the effect of the distribution of a dividend” and was thus taxable as ordinary income up to $2,319,611, the amount of Basin’s accumulated earnings and profits at the time of the merger. The Commissioner assessed a deficiency of $972,504.74.
Respondents petitioned for review in the Tax Court, which, in a reviewed decision, held in their favor. 86 T. C. 138 (1986). The court started from the premise that the question whether the boot payment had “the effect of the distribution of a dividend” turns on the choice between “two judicially articulated tests.” Id., at 140. Under the test advocated by the Commissioner and given voice in Shimberg v. United States, 577 F. 2d 283 (CA5 1978), cert. denied, 439 U. S. 1115 (1979), the boot payment is treated as though it were made in a hypothetical redemption by the acquired corporation (Basin) immediately prior to the reorganization. [733]*733Under this test, the cash payment received by the taxpayer indisputably would have been treated as a dividend.5 The second test, urged by the taxpayer and finding support in Wright v. United States, 482 F. 2d 600 (CA8 1973), proposes an alternative hypothetical redemption.
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Justice Stevens
delivered the opinion of the Court.
This is the third case in which the Government has asked us to decide that a shareholder’s receipt of a cash payment in exchange for a portion of his stock was taxable as a dividend. In the two earlier cases, Commissioner v. Estate of Bedford, 325 U. S. 283 (1945), and United States v. Davis, 397 U. S. 301 (1970), we agreed with the Government largely because the transactions involved redemptions of stock by single corporations that did not “result in a meaningful reduction of the shareholder’s proportionate interest in the corporation.” [729]*729Id., at 313. In the case we decide today, however, the taxpayer 1 in an arm’s-length transaction exchanged his interest in the acquired corporation for less than 1% of the stock of the acquiring corporation and a substantial cash payment. The taxpayer held no interest in the acquiring corporation prior to the reorganization. Viewing the exchange as a whole, we conclude that the cash payment is not appropriately characterized as a dividend. We accordingly agree with the Tax Court and with the Court of Appeals that the taxpayer is entitled to capital gains treatment of the cash payment.
I
In determining tax liability under the Internal Revenue Code of 1954, gain resulting from the sale or exchange of property is generally treated as capital gain, whereas the receipt of cash dividends is treated as ordinary income.2 The Code, however, imposes no current tax on certain stock-for-stock exchanges. In particular, § 354(a)(1) provides, subject to various limitations, for nonrecognition of gain resulting from the exchange of stock or securities solely for other stock or securities, provided that the exchange is pursuant to a plan of corporate reorganization and that the stock or securi[730]*730ties are those of a party to the reorganization.3 26 U. S. C. § 354(a)(1).
Under § 356(a)(1) of the Code, if such a stock-for-stock exchange is accompanied by additional consideration in the form of a cash payment or other property — something that tax practitioners refer to as “boot” — “then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.” 26 u! S. C. §356(a)(1). That is, if the shareholder receives boot, he or she must recognize the gain on the exchange up to the value of the boot. Boot is accordingly generally treated as a gain from the sale or exchange of property and is recognized in the current tax year.
Section 356(a)(2), which controls the decision in this case, creates an exception to that general rule. It provided in 1979:
“If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend, then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after [731]*731February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.” 26 U. S. C. § 356 (a)(2) (1976 ed.).
Thus, if the “exchange . . . has the effect of the distribution of a dividend,” the boot must be treated as a dividend and is therefore appropriately taxed as ordinary income to the extent that gain is realized. In contrast, if the exchange does not have “the effect of the distribution of a dividend,” the boot must be treated as a payment in exchange for property and, insofar as gain is realized, accorded capital gains treatment. The question in this case is thus whether the exchange between the taxpayer and the acquiring corporation had “the effect of the distribution of a dividend” within the meaning of § 356(a)(2).
The relevant facts are easily summarized. For approximately 15 years prior to April 1979, the taxpayer was the president of Basin Surveys, Inc. (Basin). In January 1978, he became sole shareholder in Basin, a company in which he had invested approximately $85,000. The corporation operated a successful business providing various technical services to the petroleum industry. In 1978, N. L. Industries, Inc. (NL), a publicly owned corporation engaged in the manufacture and supply of petroleum equipment and services, initiated negotiations with the taxpayer regarding the possible acquisition of Basin. On April 3, 1979, after months of negotiations, the taxpayer and NL entered into a contract.
The agreement provided for a “triangular merger,” whereby Basin was merged into a wholly owned subsidiary of NL. In exchange for transferring all of the outstanding shares in Basin to NL’s subsidiary, the taxpayer elected to receive 300,000 shares of NL common stock and cash boot of $3,250,000, passing up an alternative offer of 425,000 shares of NL common stock. The 300,000 shares of NL issued to the taxpayer amounted to approximately 0.92% of the out[732]*732standing common shares of NL. If the taxpayer had instead accepted the pure stock-for-stock offer, he would have held approximately 1.3% of the outstanding common shares. The Commissioner and the taxpayer agree that the merger at issue qualifies as a reorganization under §§ 368(a)(1)(A) and (a)(2)(D).4
Respondents filed a joint federal income tax return for 1979. As required by § 356(a)(1), they reported the cash boot as taxable gain. In calculating the tax owed, respondents characterized the payment as long-term capital gain. The Commissioner on audit disagreed with this characterization. In his view, the payment had “the effect of the distribution of a dividend” and was thus taxable as ordinary income up to $2,319,611, the amount of Basin’s accumulated earnings and profits at the time of the merger. The Commissioner assessed a deficiency of $972,504.74.
Respondents petitioned for review in the Tax Court, which, in a reviewed decision, held in their favor. 86 T. C. 138 (1986). The court started from the premise that the question whether the boot payment had “the effect of the distribution of a dividend” turns on the choice between “two judicially articulated tests.” Id., at 140. Under the test advocated by the Commissioner and given voice in Shimberg v. United States, 577 F. 2d 283 (CA5 1978), cert. denied, 439 U. S. 1115 (1979), the boot payment is treated as though it were made in a hypothetical redemption by the acquired corporation (Basin) immediately prior to the reorganization. [733]*733Under this test, the cash payment received by the taxpayer indisputably would have been treated as a dividend.5 The second test, urged by the taxpayer and finding support in Wright v. United States, 482 F. 2d 600 (CA8 1973), proposes an alternative hypothetical redemption. Rather than concentrating on the taxpayer’s prereorganization interest in the acquired corporation, this test requires that one imagine a pure stock-for-stoek exchange, followed im'mediately by a postreorganization redemption of a portion of the taxpayer’s shares in the acquiring corporation (NL) in return for a payment in an amount equal to the boot. Under §302 of the Code, which defines when a redemption of stock should be treated as a distribution of dividend, NL’s redemption of 125,000 shares of its stock from the taxpayer in exchange for the $3,250,000 boot payment would have been treated as capital gain.6
[734]*734The Tax Court rejected the prereorganization test favored by the Commissioner because it considered it improper “to view the cash payment as an isolated event totally separate from the reorganization.” 86 T. C., at 151. Indeed, it sug[735]*735gested that this test requires that courts make the “determination of dividend equivalency fantasizing that the reorganization does not exist.” Id., at 150 (footnote omitted). The court then acknowledged that a similar criticism could be made of the taxpayer’s contention that the cash payment should be viewed as a postreorganization redemption. It concluded, however, that since it was perfectly clear that the cash payment would not have taken place without the reorganization, it was better to treat the boot “as the equivalent of a redemption in the course of implementing the reorganization,” than “as having occurred prior to and separate from the reorganization” Id., at 152 (emphasis in original).7
[736]*736The Court of Appeals for the Fourth Circuit affirmed. 828 F. 2d 221 (1987). Like the Tax Court, it concluded that although “[s]ection 302 does not explicitly apply in the reorganization context,” id., at 223, and although §302 differs from §356 in important respects, id., at 224, it nonetheless provides “the appropriate test for determining whether boot is ordinary income or a capital gain,” id., at 223. Thus, as explicated in § 302(b)(2), if the taxpayer relinquished more than 20% of his corporate control and retained less than 50% of the voting shares after the distribution, the boot would be treated as capital gain. However, as the Court of Appeals recognized, “[bjecause § 302 was designed to deal with a stock redemption by a single corporation, rather than a reorganization involving two companies, the section does not indicate which corporation [the taxpayer] lost interest in.” Id., at 224. Thus, like the Tax Court, the Court of Appeals was left to consider whether the hypothetical redemption should be treated as a prereorganization distribution coming from the acquired corporation or as a postreorganization distribution coming from the acquiring corporation. It concluded:
“Based on the language and legislative history of § 356, the change-in-ownership principle of § 302, and the need to review the reorganization as an integrated transaction, we conclude that the boot should be characterized as a post-reorganization stock redemption by N. L. that affected [the taxpayer’s] interest in the new corporation. Because this redemption reduced [the taxpayer’s] N. L. holdings by more than 20%, the boot should be taxed as a capital gain.” Id., at 224-225.
This decision by the Court of Appeals for the Fourth Circuit is in conflict with the decision of the Fifth Circuit in Shimberg v. United States, 577 F. 2d 283 (1978), in two important respects. In Shimberg, the court concluded that it was inappropriate to apply stock redemption principles in reorganization cases “on a wholesale basis.” Id., at 287; see also ibid., n. 13. In addition, the court adopted the pre-[737]*737reorganization test, holding that “§ 356(a)(2) requires a determination of whether the distribution would have been taxed as a dividend if made prior to the reorganization or if no reorganization had occurred.” Id., at 288.
To resolve this conflict on a question of importance to the administration of the federal tax laws, we granted certiorari. 485 U. S. 933 (1988).
II
We agree with the Tax Court and the Court of Appeals for the Fourth Circuit that the question under § 356(a)(2) whether an “exchange . . . has the effect of the distribution of a dividend” should be answered by examining the effect of the exchange as a whole. We think the language and history of the statute, as well as a commonsense understanding of the economic substance of the transaction at issue, support this approach.
The language of § 356(a) strongly supports our understanding that the transaction should be treated as an integrated whole. Section 356(a)(2) asks whether “an exchange is described in paragraph (1)” that “has the effect of the distribution of a dividend.” (Emphasis supplied.) The statute does not provide that boot shall be treated as a dividend if its payment has the effect of the distribution of a dividend. Rather, the inquiry turns on whether the “exchange” has that effect. Moreover, paragraph (1), in turn, looks to whether “the property received in the exchange consists not only of property permitted by section 354 or 355 to be received without the recognition of gain but also of other property or money.” (Emphasis supplied.) Again, the statute plainly refers to one integrated transaction and, again, makes clear that we are to look to the character of the exchange as a whole and not simply its component parts. Finally, it is significant that §356 expressly limits the extent to which boot may be taxed to the amount of gain realized in the reorganization. This limitation suggests that Congress intended that boot not be treated in isolation from [738]*738the overall reorganization. See Levin, Adess, & McGaffey, Boot Distributions in Corporate Reorganizations — Determination of Dividend Equivalency, 30 Tax Lawyer 287, 303 (1977).
Our reading of the statute as requiring that the transaction be treated as a unified whole is reinforced by the well-established “step-transaction” doctrine, a doctrine that the Government has applied in related contexts, see, e. g., Rev. Rul. 75-447, 1975-2 Cum. Bull. 113, and that we have expressly sanctioned, see Minnesota Tea Co. v. Helvering, 302 U. S. 609, 613 (1938); Commissioner v. Court Holding Co., 324 U. S. 331, 334 (1945). Under this doctrine, interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction. By thus “linking together all interdependent steps with legal or business significance, rather than taking them in isolation,” federal tax liability may be based “on a realistic view of the entire transaction.” 1 B. Bittker, Federal Taxation of Income, Estates and Gifts ¶4.3.5, p. 4-52 (1981).
Viewing the exchange in this case as an integrated whole, we are unable to accept the Commissioner’s prereorganization analogy. The analogy severs the payment of boot from the context of the reorganization. Indeed, only by straining to abstract the payment of boot from the context of the overall exchange, and thus imagining that Basin made a distribution to the taxpayer independently of NL’s planned acquisition, can we reach the rather counterintuitive conclusion urged by the Commissioner — that the taxpayer suffered no meaningful reduction in his ownership interest as a result of the cash payment. We conclude that such a limited view of the transaction is plainly inconsistent with the statute’s direction that we look to the effect of the entire exchange.
The prereorganization analogy is further flawed in that it adopts an overly expansive reading of § 356(a)(2). As the Court of Appeals recognized, adoption of the prereorganization approach would “result in ordinary income treatment in [739]*739most reorganizations because corporate boot is usually distributed pro rata to the shareholders of the target corporation.” 828 F. 2d, at 227; see also Golub, “Boot” in Reorganizations — The Dividend Equivalency Test of Section 356(a) (2), 58 Taxes 904, 911 (1980); Note, 20 Boston College L. Rev. 601, 612 (1979). Such a reading of the statute would not simply constitute a return to the widely criticized “automatic dividend rule” (at least as to cases involving a pro rata payment to the shareholders of the acquired corporation), see n. 8, supra, but also would be contrary to our standard approach to construing such provisions. The requirement of § 356(a)(2) that boot be treated as dividend in some circumstances is an exception from the general rule authorizing capital gains treatment for boot. In construing provisions such as § 356, in which a general statement of policy is qualified by an exception, we usually read the exception narrowly in order to preserve the primary operation of the provision. See Phillips, Inc. v. Walling, 324 U. S. 490, 493 (1945) (“To extend an exemption to other than those plainly and unmistakably within its terms and spirit is to abuse the interpretative process and to frustrate the announced will of the people”). Given that Congress has enacted a general rule that treats boot as capital gain, we should not eviscerate that legislative judgment through an expansive reading of a somewhat ambiguous exception.
The postreorganization approach adopted by the Tax Court and the Court of Appeals is, in our view, preferable to the Commissioner’s approach. Most significantly, this approach does a far better job of treating the payment of boot as a component of the overall exchange. Unlike the prereorganization view, this approach acknowledges that there would have been no cash payment absent the exchange and also that, by accepting the cash payment, the taxpayer experienced a meaningful reduction in his potential ownership interest.
Once the postreorganization approach is adopted, the result in this case is pellucidly clear. Section 302(a) of the [740]*740Code provides that if a redemption fits within any one of the four categories set out in § 302(b), the redemption “shall be treated as a distribution in part or full payment in exchange for the stock,” and thus not regarded as a dividend. As the Tax Court and the Court of Appeals correctly determined, the hypothetical postreorganization redemption by NL of a portion of the taxpayer’s shares satisfies at least one of the subsections of § 302(b).8 In particular, the safe harbor provisions of subsection (b)(2) provide that redemptions in which the taxpayer relinquishes more than 20% of his or her share of the corporation’s voting stock and retains less than 50% of the voting stock after the redemption shall not be treated as distributions of a dividend. See n. 6, supra. Here, we treat the transaction as though NL redeemed 125,000 shares of its common stock (i. e., the number of shares of NL common stock forgone in favor of the boot) in return for a cash payment to the taxpayer of $3,250,000 (i. e., the amount of the boot). As a result of this redemption, the taxpayer’s interest in NL was reduced from 1.3% of the outstanding common stock to 0.9%. See 86 T. C., at 153. Thus, the taxpayer relinquished approximately 29% of his interest in NL and retained less than a 1% voting interest in the corporation after the transaction, easily satisfying the “substantially disproportionate” standards of § 302(b)(2). We accordingly conclude that the boot payment did not have the effect of a dividend and that the payment was properly treated as capital gain.
Ill
The Commissioner objects to this “recasting [of] the merger transaction into a form different from that entered [741]*741into by the parties,” Brief for Petitioner 11, and argues that the Court of Appeals’ formal adherence to the principles embodied in §302 forced the court to stretch to “find a redemption to which to apply them, since the merger transaction entered into by the parties did not involve a redemption,” id., at 28. There are a number of sufficient responses to this argument. We think it first worth emphasizing that the Commissioner overstates the extent to which the redemption is imagined. As the Court of Appeals for the Fifth Circuit noted in Shimberg, “[t]he theory behind tax-free corporate reorganizations is that the transaction is merely ‘a continuance of the proprietary interests in the continuing enterprise under modified corporate form.’ Lewis v. Commissioner of Internal Revenue, 176 F. 2d 646, 648 (CA1 1949); Treas. Reg. § 1.368-l(b). See generally Cohen, Conglomerate Mergers and Taxation, 55 A. B. A. J. 40 (1969).” 577 F. 2d, at 288. As a result, the boot-for-stock transaction can be viewed as a partial repurchase of stock by the continuing corporate enterprise — i. e., as a redemption. It is, of course, true that both the prereorganization and postreorganization analogies are somewhat artificial in that they imagine that the redemption occurred outside the confines of the actual reorganization. However, if forced to choose between the two analogies, the postreorganization view is the less artificial. Although both analogies “recast the merger transaction,” the postreorganization view recognizes that a reorganization has taken place, while the prereorganization approach recasts the transaction to the exclusion of the overall exchange.
Moreover, we doubt that abandoning the prereorganization and postreorganization analogies and the principles of § 302 in favor of a less artificial understanding of the transaction would lead to a result different from that reached by the Court of Appeals. Although the statute is admittedly ambiguous and the legislative history sparse, we are persuaded — even without relying on §302 — that Congress did not intend to except reorganizations such as that at issue [742]*742here from the general rule allowing capital gains treatment for cash boot. 26 U. S. C. § 356(a)(1). The legislative history of § 356(a)(2), although perhaps generally “not illuminating,” Estate of Bedford, 325 U. S., at 290, suggests that Congress was primarily concerned with preventing corporations from “siphon[ing] off” accumulated earnings and profits at a capital gains rate through the ruse of a reorganization. See Golub, 58 Taxes, at 905. This purpose is not served by denying capital gains treatment in a case such as this in which the taxpayer entered into an arm’s-length transaction with a corporation in which he had no prior interest, exchanging his stock in the acquired corporation for less than a 1% interest in the acquiring corporation and a substantial cash boot.
Section 356(a)(2) finds its genesis in § 203(d)(2) of the Revenue Act of 1924. See 43 Stat. 257. Although modified slightly over the years, the provisions are in relevant substance identical. The accompanying House Report asserts that §203(d)(2) was designed to “preven[t] evasion.” H. R. Rep. No. 179, 68th Cong., 1st Sess., 15 (1924). Without further explication, both the House and Senate Reports simply rely on an example to explain, in the words of both Reports, “[t]he necessity for this provision.” Ibid.; S. Rep. No. 398, 68th Cong., 1st Sess., 16 (1924). Significantly, the example describes a situation in which there was no change in the stockholders’ relative ownership interests, but merely the creation of a wholly owned subsidiary as a mechanism for making a cash distribution to the shareholders:
“Corporation A has capital stock of $100,000, and earnings and profits accumulated since March 1, 1913, of $50,000. If it distributes the $50,000 as a dividend to its stockholders, the amount distributed will be taxed at the full surtax rates.
“On the other hand, Corporation A may organize Corporation B, to which it transfers all its assets, the consideration for the transfer being the issuance by B of all its stock and $50,000 in cash to the stockholders of Corpora[743]*743tion A in exchange for their stock in Corporation A. Under the existing law, the $50,000 distributed with the stock of Corporation B would be taxed, not as a dividend, but as a capital gain, subject only to the 1214 per cent rate. The effect of such a distribution is obviously the same as if the corporation had declared out as a dividend its $50,000 earnings and profits. If dividends are to be subject to the full surtax rates, then such an amount so distributed should also be subject to the surtax rates and not to the 1214 per cent rate on capital gain.” Ibid.; H. R. Rep. No. 179, at 15.
The “effect” of the transaction in this example is to transfer accumulated earnings and profits to the shareholders without altering their respective ownership interests in the continuing enterprise.
Of course, this example should not be understood as exhaustive of the proper applications of § 356(a)(2). It is nonetheless noteworthy that neither the example, nor any other legislative source, evinces a congressional intent to tax boot accompanying a transaction that involves a bona fide exchange between unrelated parties in the context of a reorganization as though the payment was in fact a dividend. To the contrary, the purpose of avoiding tax evasion suggests that Congress did not intend to impose an ordinary income tax in such cases. Moreover, the legislative history of § 302 supports this reading of § 356(a)(2) as well. In explaining the “essentially equivalent to a dividend” language of §302 (b)(1) — language that is certainly similar to the “has the effect ... of a dividend” language of § 356(a)(2) — the Senate Finance Committee made clear that the relevant inquiry is “whether or not the transaction by its nature may properly be characterized as a sale of stock . . . .” S. Rep. No. 1622, 83d Cong., 2d Sess., 234 (1954); cf. United States v. Davis, 397 U. S., at 311.
Examining the instant transaction in light of the purpose of § 356(a)(2), the boot-for-stock exchange in this case “may [744]*744properly be characterized as a sale of stock.” Significantly, unlike traditional single corporation redemptions and unlike reorganizations involving commonly owned corporations, there is little risk that the reorganization at issue was used as a ruse to distribute a dividend. Rather, the transaction appears in all respects relevant to the narrow issue before us to have been comparable to an arm’s-length sale by the taxpayer to NL. This conclusion, moreover, is supported by the findings of the Tax Court. The court found that “[t]here is not the slightest evidence that the cash payment was a concealed distribution from BASIN.” 86 T. C., at 155. As the Tax Court further noted, Basin lacked the funds to make such a distribution:
“Indeed, it is hard to conceive that such a possibility could even have been considered, for a distribution of that amount was not only far in excess of the accumulated earnings and profits ($2,319,611), but also of the total assets of BASIN ($2,758,069). In fact, only if one takes into account unrealized appreciation in the value of BASIN’s assets, including good will and/or going-concern value, can one possibly arrive at $3,250,000. Such a distribution could only be considered as the equivalent of a complete liquidation of BASIN . . . .” Ibid,9
In this context, even without relying on § 302 and the post-reorganization analogy, we conclude that the boot is better characterized as a part of the proceeds of a sale of stock than [745]*745as a proxy for a dividend. As such, the payment qualifies for capital gains treatment.
The judgment of the Court of Appeals is accordingly
Affirmed.
Justice Scalia joins all but Part III of this opinion.