Section 3 Redemptions Not Essentially Equivalent to a Dividend

• Library: Bus Trans 2005

I.R.C. § 302(b)(1) provides that a redemption will receive exchange treatment “if the redemption is not essentially equivalent to a dividend.” Unlike the I.R.C. § 302(b)(2) and (3) tests discussed in §§2.4 and 2.5 below, I.R.C. § 302(b)(1) is not a mathematical test. Thus, this test is the hardest in terms of determining if it has been satisfied. It is possible to obtain a ruling from the IRS in this area. See §2.52, infra.

Treasury Regulation § 1.302-2(b) provides that “whether a distribution in redemption of stock of a shareholder is not essentially equivalent to a dividend” depends on the facts and circumstances of each case. One of the facts to be considered in making this determination is the constructive ownership rules of I.R.C. § 318(a), discussed in §§2.7–2.13 below.

All distributions in pro rata redemption of a part of the stock of a corporation will generally be treated as dividend distributions under I.R.C. § 301 if the corporation has only one class of stock outstanding. The redemption of all of one class of stock, either at one time or in a series of redemptions, will generally be considered a dividend distribution under I.R.C. § 301 if all classes of stock outstanding at the time of the redemption are held in the same proportion. Distributions in redemption of stock may be treated as dividend distributions under I.R.C. § 301 regardless of the...