Marital Dissolution Stock Redemption

1
Marital Dissolution Stock Redemption
C Corp
Cash or Property
Constructive dividend
Sells Stock
Spouse A
Spouse B
Divorce Decree
2
Final Regs Under 1041
Issue If redemption part of divorce, what is
relationship of 1041 (no gain or loss on divorce
property division) and 302 redemption
provisions? Reg. 1.1041-2(c) If
redemption for benefit of non-transferring spouse
under primary and unconditional obligation
standard, then - No gain or loss to
transferring spouse per 1041. -
Constructive dividend to non-transferring
spouse. If primary and unconditional
standard not met for constructive dividend, then
1041 not apply and transferring spouse must
recognize gain or loss. Parties may elect
opposite rule to one that would otherwise apply
if they both agree. Bottom line No
opportunity to whipsaw and both avoid tax.
3
Problem 282

• Basic Facts P owns 25k of F Corp 100k
  outstanding common shares. FMV stock 2.5 mill
  (100 per share) basis 25k. Mucho E P. F
  Corp has right of first refusal. P wants to give
  100k to alma mater SU.
• F Corp distributes 100k to P in redemption of
  1000 shares P gives cash to SU. 100k dividend
  because not qualify under 302(b) series. P has
  100k dividend income and 100k charitable
  contribution, subject to 170 deduction
  limitations.
• P gifts 1000 shares to SU and F Corp redeems from
  SU for 100k two months pursuant to oral
  understanding. SU under no obligation. If no
  obligation (just oral understanding), no
  constructive dividend to P per Grove and Rev.
  Rule 78-197. P has 100k charitable contribution
  deduction and no income.
• Same, except P gives 250 shares a year for four
  years and SU always redeems. Still OK under
  Grove if SU not obligated, but pattern is riskier
  suggests deal.

4
304 Brother-Sister Redemptions

• 304 impact
• - A redemption tested by B
• ownership change.
• If 301 distribution, first A EP,
• then B EP.
• If 301 distribution, deemed 351
• transfer to A, followed by A
• redemption of hypothetical
• shares.
• 304 trumps 351 boot rule if
• stock and property actually
• transferred by A. Not so for
• acquisition debt.
• - Corporate 50 318 factor reduced to 5.

A Corp
B Corp
B Corp Stock
Cash or Property
Common Owner 50 of both
5
304 Parent-Sub Redemptions

• 304 impact
• - A redemption tested by B
• ownership change.
• If 301 distribution, first A EP,
• then B EP.
• - 304 trumps 351 boot rule if
• stock and property actually
• transferred by A. Not so for
• acquisition debt.
• - Corporate 50 318 factor reduced to 5.

A Corp
B Corp
50 Owned
B Corp Stock
Cash or Property
50 owned
Stock Owner
6
Problem 295 - 2

• Basic Facts B Corp has 100 shares outstanding
  no EP. O Corp has 100 shares outstanding 5k
  accumulated EP. C owns 80 shares of B Corp
  (basis 40k) and 60 shares of O Corp (basis 9k).
• C sells 20 O Corp shares (basis 3k) to B Corp for
  4k.
• - Since C has control of both corps (at
  least 50 voting), 304(a)(1) treats as
  constructive redemption of B corp stock tested by
  Cs holding in O Corp stock. Percentage in O
  Corp 60 before and 56 after (40 direct and 16
  via B Corp). Hence, C deemed to have received
  301 distribution from B Corp.
• - Distribution first out of B Corp EP
  (0), then O Corp EP. Hence, 4k dividend under
  301. O Corp EP reduced to 1k.
• - C basis in B Corp stock increase 3k
  (basis in O corp transferred shares) to 43k, as
  if 351 transaction. B corp basis in O Corp
  transferred stock 3k (transferred basis) per 362,
  as if 351 transaction.

7
Problem 295 - 2
Basic Facts B Corp has 100 shares outstanding
no EP. O Corp has 100 shares outstanding 5k
accumulated EP. C owns 80 shares of B Corp
(basis 40k) and 60 shares of O Corp (basis
9k). (b) C sells 20 O Corp shares (basis 3k) to
B Corp for 3k cash and I share B stock (FMV 1k).
- Since C has control of both corps (at
least 50 voting), 304(a)(1) treats as
constructive redemption of B corp stock tested by
Cs holding in O Corp stock. C would like to
claim straight 351 deal with 3k boot and 1k gain
(4k minus basis of 3k. Not so because
304(b)(3)(A) says 351 applies only to
stock-for-stock portion of exchange, not boot.
304(a) governs boot. - Here 3k deemed
redemption of B Corp stock tested by Cs holdings
in O Corp. As in (a), clear 301 dividend of 3k,
which reduce O Corp EP.
8
Problem 295 - 2
Basic Facts B Corp has 100 shares outstanding
no EP. O Corp has 100 shares outstanding 5k
accumulated EP. C owns 80 shares of B Corp
(basis 40k) and 60 shares of O Corp (basis
9k). (c C sells 20 O Corp shares (basis 3k)
to B Corp for 1 share B stock (FMV 1k) and O Corp
takes stock subject to 3k debt C incurred to buy
stock. - 304(b)(3)(B) exception says
304(a) not apply to liability assumed or taken
subject to in 351 transaction if liability
incurred by transferor to acquire stock.
- So here straight 351 transaction. Per 357,
liability transfer does not trigger any gain or
loss (not in excess of basis). C basis in 1
share of B Corp stock received is zero (3k basis
in O Corp stock transferred less 3k debt
transferred) per 358(d).
9
Problem 295 - 2

• Basic Facts B Corp has 100 shares outstanding
  no EP. O Corp has 100 shares outstanding 5k
  accumulated EP. C owns 80 shares of B Corp
  (basis 40k) and 60 shares of O Corp (basis 9k).
• C sells all 60 O Corp shares (basis 3k) to B
  Corp for 12k cash.
• - Since C control both (50 plus voting
  stock), deemed redemption from B Corp to C tested
  against O Corps percentages before and after.
  Before percentage was 60 after is 48
  (attribution from B Corp). No hope under
  302(b)(2) because not less than 80. May have
  good (b)(1) not essentially equivalent to
  dividend argument because now under 50.
• - Query impact of B Corp (controlled by
  C) controlling now O Corp. Does this wipe out
  (b)(1) hope? Probably not.
• - If valid exchange, not 301 dividend, C
  has 3k LTCG (12k minus 9k basis). Cs B corp
  basis not effected.

10
303 Redemption
Purpose Permit exchange treatment on
redemption of stock included in dead persons
estate that otherwise would be 301 dividend
distribution to pay estate and inheritance taxes
and funeral and administrative expenses.
Requirements - Timing Pay within 90 days
of estate tax assessment period, 60 days after
Tax Court determination, of 6166 installment
period. Distributions after 4 yrs limited to
lesser of unpaid qualified items just before
distribution or qualified items paid within one
year of distribution. - 35 Test FMV of
stock must exceed 35 of gross estate less 2053
and 2054 deductions (debts, expenses and
losses). - If own 20 or more of multiple
corps, can aggregate for 35 test. Spouse
interest in community property or jointly owned
stock included for 20 test but not 35 test.
11
Problem 297
Basic Facts G dies Gross estate 2 mill 100k
estate taxes and burial and administration
expenses Estate includes 200k FMV X Corp stock
(total o/s FMV 1.4 mill) and 400k FMV Y Corp
stock (total o/s FMV 1.6 mill). G wife A owns
200k X Corp stock, which she held as
tenant-in-common with G. Will Y Corp redemption
qualify for 303 treatment? - 303 requirement is
over 35 of gross estate less allowable
deductions (here 1.9 mill). 35 is 665k. - Y
stock of 400k isnt enough. X stock in estate
can be aggregated if estate owns 20 or more of
all classes of stock of both entities. Wife As
tenant-in-common shares may be included for 20
test, but not 35 test. With Wife As shares,
20 test met for both X and Y, so can consider
both. - But 35 test still failed because
value of X and Y stock in estate only 600k, not
665. Hence, 303 redemption treatment not
available.