Section 5 Complete Termination of Interest Redemptions

LibraryBus Trans 2005

I.R.C. § 302(b)(3) provides that a redemption will be treated as an exchange (and thus qualifies for capital gain or loss, provided the stock is a capital asset in the hands of the redeeming shareholder) “if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.” The I.R.C. § 318 attribution of ownership rules apply in making this determination. See §§2.7–2.13, infra.

If a shareholder would qualify under the I.R.C. § 302(b)(3) complete termination of interest rule but for the fact that, under I.R.C. § 318(a)(1), the shareholder is considered to own stock owned by the shareholder’s spouse, children, grandchildren, or parents, these family attribution rules may be waived so the redemption can otherwise qualify under I.R.C. § 302(b)(3). The waiver rule applies only to family attribution. The waiver rule does not apply to other attribution under I.R.C. § 318, e.g., estate, trust, corporation, or other entity attribution.

The I.R.C. § 302(c)(2) waiver of attribution rules have the following requirements:

          1. immediately after the distribution the distributee has no interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor
          2. the distributee does not acquire any such interest [in the corporation] (other than stock acquired by bequest or inheritance) within 10 years from the date of such distribution, and
          3. the distributee . . . files an agreement to notify the Secretary of any acquisition described in clause (ii) and to retain such records [of the transaction]

I.R.C. § 302(c)(2)(A)(i)–(iii).

Treasury Regulation § 1.302-4 sets forth the requirements for the waiver agreement that must be attached to the redeeming shareholder’s tax return. There is no official form.

In addition, the requirements of I.R.C. § 302(c)(2)(B), relating to situations involving stock transfers to or from related parties during the preceding ten-year period, must be satisfied. These rules are discussed below.

All aspects of these rules must be satisfied.

The Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, 96 Stat. 324, extended these rules to allow waiver of the family attribution rules by entities (e.g., partnerships, estates, trusts, or corporations) if each related person (e.g., beneficiary or other person who is attributed ownership to the entity under I.R.C. § 318(a)(2)) joins in the waiver agreement. See I.R.C. § 302(c)(2)(C)...

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