C Corp Redemption

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C Corp Redemption
Redemption C corp buys stock from
shareholder. Big Question Is transaction
treated as exchange or as a dividend governed by
Section 301 rule? If exchange -
Shareholder has no gain to extent of stock
basis. - Excess subject to capital gain
treatment. If dividend under 301 - All
ordinary dividend income to extent of EP then
basis recovery then sale treatment. - Note
with dividend rate now equal to capital gain rate
(15 gift from Bush), only substantive difference
is priority on recovery of basis vis-à-vis EP.
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Four Options Under 302(b)
(b)(1) - Not essentially equivalent to a
dividend (b)(2) - Substantially
disproportionate (b)(3) - Complete
termination of shareholders interest (b)(4) -
Partial liquidation
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318 Attribution Rules
Family Attribution - Parents, spouse, children,
grandchildren. No sibling, in-law or grandparent
attribution. Entity from attribution -
Proportional attribution to owner or beneficiary
for stock owned by partnership, estate or trust.
Corporate proportionate attribution (based on FMV
of stock) to shareholder who owns, directly or
via attribution, 50 or more of stock value.
Entity to attribution - Stock owned by partners
or beneficiaries attributed to partnership,
estate or trust. Attribution to corp only for
stock held by 50 or more shareholder. Option
attribution - All stock subject to option deemed
owned by the holder of option. Chain attribution
generally Ok (child to parent to corp), but no
double family attribution (child to parent to
grandparent).
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302(b)(2) Substantially Disproportionate
Three mechanical requirements 1. After
redemption, shareholder owns less than 50 of
total combined voting power. 2. After
redemption, percent of voting stock less than 80
of percentage of voting before redemption. 3.
After redemption, percent of all common (voting
and non-voting) less than 80 of percentage
before redemption. Note - Full
attribution rules apply. - Multiple
transactions part of common plan are aggregated.
Rev. Rule 85-14.
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302(b)(3) Complete Termination
Requirement Shareholder is finished takes
a permanent hike. Only remaining interest can be
creditor nothing else. The Big Break No
family attribution. Makes it possible to
transition corp stock to next generation.
Special rules - 10 year forward rule
Selling shareholder not acquire any stock for 10
years, except by bequest or inheritance. - 10
year back rule Last 10 years, selling
shareholder acquired stock from 318 relative or
318 relative acquired stock from selling
shareholder. Not apply if tax avoidance not
principal purpose.
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Problem 213 -1
Facts W Corp 100 share outstanding GF
25 shares Mother 20 shares Daughter 15
shares adopted Son 10 shares GMs estate
(Mother 50 beneficiary) 30 shares. Mother has
option on 5 shares owned by son. GF
constructive ownership 85 shares 25 personal
20 mother direct 25 from grandchildren 15 from
estate via mother. Daughter constructive
ownership 55 shares 15 personal 20 Mother
direct 5 mother via option 15 estate via
Mother. GM Estate constructive ownership 100
shares 30 direct 70 Mother, including 20
mother, 25 GF and 25 kids.
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Problem 213 - 2
Facts 100 shares X Corp owned by partnership
four equal partners, A,B,C,D. As wife W owns
all 100 shares of Y Corp stock. (a) A
ownership of X Corp 25 shares via partnership.
W ownership of X Corp 25 shares via A
spouse and partnership. Ws mother 0
because no in-law attribution. (b) Y corp
ownership of X Corp 25 shares via A to W and W
to Y corp (50 or more shareholder). If W owned
10 of Y, no attribution to Y because 50 or more
test not satisfied. (c) Y shares owned by
Partnership All 100 via W to A to Partnership.
B,C D partners No Y shares. No
sideways attribution from partner to
partnership to other partners. X Corp
ownership of Y All 100 shares via partnership
ownership.
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Problem 217 - 1
Facts Y Corp has 100 shares common voting,
200 shared nonvoting preferred. A owns 80
common, 100 preferred. C owns 20 common, 100
preferred. A and C unrelated. Issue is
302(b)(2). (a) 1/15 T redeems 75 of As
preferred shares. No hope under 302(b)(2)
because only nonvoting redeemed. Reg.
1.302-3(a). (b) Y also redeems 60 of As
common shares. No hope under (b)(2) because A
own 50 of voting common after redemption 20
out of 40 shares. Must own less than 50 voting
per 302(b)(2)(B). (c) Y redeems 70 of As
common shares. 302(b)(2) satisfied. Less than
50 voting after (33) percentage voting after
(33) less than 80 of percentage voting before
(80) total percentage after (35/155 or 23)
less than 80 of total percentage before (180/300
or 60). Preferred stock redemption gets
piggybacked and qualifies under 302(b)(2) per
Reg. 1.302-3(a).
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Problem 217 - 1
Facts Y Corp has 100 shares common voting,
200 shared nonvoting preferred. A owns 80
common, 100 preferred. C owns 20 common, 100
preferred. A and C unrelated. Issue is
302(b)(2). (d) On 12/1, 10 shares of Cs
common stock redeemed. Issue is whether they are
linked. If not, As redemption qualifies under
(b)(2) per above. If they are linked, A own 50
of common after (10 of 20) and thus would not
qualify. Note, the 80 substantially
disproportionate tests are satisfied, not the
50 test. Is 302(b)(2)(D) applicable where
only issue is 50 test? Technically No.
Standard step-transaction principles would be
applied. Big question Were events linked and
planned together?
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Problem 217 - 2
Facts Z Corp has 100 shares common voting,
200 shared nonvoting common. Each share FMV 100.
D owns 60 voting, 100 nonvoting. J owns rest. D
J unrelated. Z redeems 30 of Ds common.
Issue is 302(b)(2). - D voting interest goes
from 60 to 42.8 - thus overall 50 voting test
and voting 80 test satisfied. - D total
percentage before was 53.3 (160/300) and is
48.1 after. Flunk overall 80 test. Thus, not
qualify under 302(b)(2). - Note Likely would
qualify under 302(b)(1) by virtue of loss of
control.
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Problem 233 -1
Facts R Corp owned by J (100 shares common),
Js daughter A (50 shares), Js son C (25
shares). Issue is 302(b)(3). (a) R redeems
As 50 shares. Qualifies under 302(b)(3) with
waiver of family attribution under 302(c)(2).
Must timely file agreement per 302(c)(2)(A)(iii).
(b) Same, but A fails to file agreement. Per
Reg. 1.302-4(a)(2), A will get reasonable
extension if (1) reasonable cause for not filing,
and (2) request filed within reasonable time.
Statute of limitations extended one year after
notification. (c) Same, but price paid to A
dependant on Rs profits. No 302(b)(3) because
no waiver of family attribution. Profits
interest is forbidden interest more than just a
creditor. Reg. 1.302-4(d). Amount or certainty
cant be contingent on profits. (d) R
redeems 20 As shares year 1, 30 shares year 2.
Year 2 redemption qualifies under (b)(3). Year 1
qualifies only if it part of firm and fixed
plan to redeem all. Need not be in writing or
binding to be firm and fixed.
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Problem 233 - 1
Facts R Corp owned by J (100 shares common),
Js daughter A (50 shares), Js son C (25
shares). Issue is 302(b)(3). (e) Same, but A
remains director. No hope under (b)(3) because
no waiver of family attribution. A holds
interest more than a creditor. 302(c)(2)(A)(i).
Even as inactive director, probably cooked in 9th
circuit. (f) Same, but two years later R forms
sub that employs A. No hope under (b)(3). Can
have no interest for ten years and this extends
to activity of subsidiary. Reg. 1.302-4(c).
(g) Same, but C dies in two years and leaves
stock to A. 302(b)(3) and waiver of family
attribution still good per parenthetical
exception in 302(c)(2)(A)(ii).
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Problem 233 - 2
Facts C, 10 year old company owned by B and
B, husband and wife. Plan to gift 30 shares to
inside child and have C corp redeem balance (120
shares) by paying 50k down and paying balance
over per 20 year note. Restrictive covenants in
effect during note term. Note secured by C
assets. B B continue to rent plant to C, but C
has 5 yr. option to buy for FMV. (a) Will
redemption qualify under 302(b)(3)? -
20 year note term outside IRS ruling standard (15
year). Some courts have allowed as long as 20
yrs, but risky. Better to keep at 15 yrs.
- Creditor covenants and security permitted.
Rev. Rule 59-119. - Continued rental and
option permitted if not dependant on profits and
terms are arms-length terms. Rev. Rule 77-467.
- Child 30 share gift not violate
302(c)(2)(B)(ii) unless principal purpose tax
avoidance. Since Son worked for company and is
targeted successor, should have no problem here.
Rev. Rule 77-293.
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Problem 233 - 2
Facts C, 10 year old company owned by B and
B, husband and wife. Plan to gift 30 shares to
inside child and have C corp redeem balance (120
shares) by paying 50k down and paying balance
over per 20 year note. Restrictive covenants in
effect during note term. Note secured by C
assets. B B continue to rent plant to C, but C
has 5 yr. option to buy for FMV. (b) Same,
but B establishes consulting firm after leaving
and firm is hired by C. Per Lynch case and Rev.
Rule 70-104, consulting deal would kill
302(b)(3). Some limited authority to contrary
where accounting services provided as independent
contractor. Very risky. Dead in 9th cir.
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Problem 233 - 3

• Facts C corp has 100 share common. J owns 50
  shares Js sister M owns 30 shares Js fathers
  estate Estate owns 20 shares Js mother B sole
  beneficiary of Estate.
• C redeems 20 shares owned by Estate. 302(b)(3)
  works if both Estate and B satisfy waiver of
  family attribution requirements and sign required
  agreement. 302(c)(2)(C).
• Same, but B residuary beneficiary of Estate and J
  and M each receive specific legacies. No hope
  for waiver of family attribution for estate per
  302(c)(2)(C) if redemption with estate. Best to
  distribute legacies to J and M, then redeem from
  Estate.
• Same, but J and M are residuary beneficiaries of
  Estate. No hope under 302(b)(3), as J and Ms
  stock attributed to Estate.
• 20 shares left to QTIP, income to B for life,
  then to third child N. C redeems shares.
  302(b)(3) permitted if B and trust join waiver
  agreement. Note, K as sibling not deemed
  related under 318(a)(1).

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Problem 233 - 3
Facts C corp has 100 share common. J owns 50
shares Js sister M owns 30 shares Js fathers
estate Estate owns 20 shares Js mother B sole
beneficiary of Estate. (e) Same as (d), but N
acquires stock of C three years after redemption.
Violates 10 year look-back rule of
302(c)(2)(A(ii) because Ns stock attributed to
trust under 318(a)(3)(A). Only family
attribution waived under 302(c)(2), not entity
attribution.