Corporate Taxation Outline

Section 302 – Redemptions and Partial Liquidations
 
a.     Introduction:
 
·         Issue: whether a redemption of a corporation own stock is treated as a dividend or and exchange
§         Dividend status is governed by 301 rules on dividends
§         Exchange status is governed under 1001, where SH generally recognizes capital gain or loss to the extend of the difference between the amount of the distribution and the SH basis in the redeemed stock.
 
·         317 – A redemption occurs when a corporation acquires its stock from a SH in exchange for money or other property (other than stock of the corporation).
§         317 – property defined as
 
·         302(a) – A redemption will be treated as an exchange of stock for property if the requirements of 302(b) are satisfied
 
·         302(d) – Any other redemption will be treated as a non-liquidating distribution under 301.
 
 
Step 1: Determine share ownership before and after
Step 2: Apply 301(b)(1), (2), or (3).
§         If the transaction falls within 301(b), it gets exchange status and other tax benefits.
 
 
 
b.     318 – Constructive Ownership of Stock – Determining Beneficial Share Ownership
 
·         318(a)(1) – Family Attribution
§         Includes spouse, children, grandchildren and parents
·         Siblings not included and grandparents
·         Legally adopted children included
 
§         318(a)(5)(b) – no family reattribution.
·         You own your spouses stock but you don’t own your spouses parents stock
§         Metzger – bad blood case between parent and child
·         HELD: court will not look at the facts and circumstances of a family relationship. The statute is taken literally and just looks at the actual relationship, not the state of the relationship.
·         R.R. 80-26
 
·         318(a)(2) – Outbound Attribution – From the Entity to the Individual
§         Partnership to partner:
·         Stock owned by partnership attributable to a partner based on their capital contribution
 
·         S corp is treated as partnership and SH treated as partners
 
·         EX) Partner A and B each own 50% of X. X also owns 50% of Y.
·         A and B both own 25% of Y constructively
 
§         Decedents estate to beneficiary:
·         Stock owned by an estate is attributable to each beneficiary based on their interest.
 
·         A beneficiary is a person who has direct and present interest in the property or income produced by the property held by the estate. 1.318-3(b)
·         A person ceases to be a beneficiary when he receives all property to which she is entitled and the possibility that she must return the property to satisfy claims is remote. 1.318-3
 
§         Trust and beneficiary:
·         Grantor trust: person who gave money to start the trust still retains a control interest in it.
·         Revocable trusts
·         All stock owned in the trust attributable to grantor
·         Non – grantors trust: Non-revocable trust
·         Attribution based on actuarial interest
 
§         Corporation to shareholder:
·         Owned proportionately by a SH who owns 50% or more of the corporations stock.
·         No attribution if SH owns less than 50%
 
§         1.318-4(c)(3) – prevents inbound attribution followed by outbound attribution.
·         Ex) A and B are both partners in X. A owns Y stock. Y stock attributable to X (inbound), but not attributable to B (outbound).
 
·         No limitation on outbound followed by inbound. Means that if Partnership owns stock, partners family can constructively own the stock.
 
 
·         318(a)(3) – Inbound Attribution – From the Individual to the Entity:
§         Partner to partnership
·         100% attribution regardless of partnership interest
 
§         Beneficiary to Estate
·         100% attribution regardless of interest
 
§         Beneficiary to Trust
·         100% attribution unless there is a remote AND contingent beneficiary – no attribution
·         Remote: actuarial value is less than 5%
·         Contingent: not vested
 
§         Shareholder to Corporation:
·         If SH owns at least 50% of the stock then the SH stock is 100% attributed
 
·         318(a)(4) – Option Attribution
§         A person who holds an option to acquire stock is considered as owning the stock
·         Doesn’t included non-vested options (has a condition precedent beyond the holders control)
 
§         This may have the effect of decreasing the percentage of stock owned by all other SH if it increases the total number of shares outstanding.
§         Don’t count the shares if they will help
·         Don’t attribute option shares if it will affect the analysis of an unrelated redeeming SH
 
 
·         318(a)(5) – Operating Rules (Limitations on Reattribution of Stock)
 
§         318(a)(5)(B) – stock that is constructively owned by an individual through family is not considered as owned actually for purposes of making another family member another owner.
·         Prevents double family attribution by providing that stock attributed once from one family member to another family member cannot be reattributed to a third member.
 
§         318(a)(5)(C) – prevents sideways attribution by providing that stock attributed once from a beneficiary to an entity cannot be reattributed from the entity to another beneficiary
 
§         318(a)(5)(D) – option attribution takes precedent over family attribution if both rules apply
·         Provides for further attributi