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Unformatted text preview: STOCK REDEMPTIONSIN GENERAL 4. Stock redemptions that qualify under 302(b) or 303 are given sale or exchange treatment . To qualify as a stock redemption in which sale or exchange treatment results, a distribution must satisfy one of the following requirements. a. Not be essentially equivalent to a dividend under 302(b)(1) (i.e., not essentially equivalent redemptions ). b. Be substantially disproportionate in terms of shareholder effect under 302(b)(2) (i.e., disproportionate redemptions ). c. Be in complete termination of a shareholders interest under 302(b)(3) (i.e., complete termination redemptions ). d. Be to a noncorporate shareholder in partial liquidation of a corporation under 302(b)(4) (i.e., partial liquidations ). e. Be used to pay a decedent shareholders death taxes and administration expenses under 303 (i.e., redemptions to pay death taxes ). 5. Because a qualifying stock redemption is treated as a sale or exchange, gain or loss to the shareholder is measured by the difference between the amount realized and the stocks adjusted basis. 6. The shareholders basis in any property received in a stock redemption is the fair market value of the property. Stock Buybacks Stimulate Redemptions . Stock redemptions often are motivated by corporate reasons. For instance, when a corporation considers its stock undervalued, it may repurchase its shares in the marketplace. By reducing the number of shares outstanding, the corporation may be able to increase its earnings per share and related financial ratios. Although the purchase is motivated by corporate reasons, each redeeming shareholder must consider the qualifying stock redemption rules to determine whether sale or exchange treatment is available. In most cases, however, the shareholders redeeming stock in these buybacks hold small stakes in the corporation and, as such, are not hindered by the qualifying stock redemption requirements. See, e.g., Rev. Rul. 76-385, 1976-2 C.B. 92 (redemption of stock from shareholder with de minimis interest qualifies as a not essentially equivalent redemption). However, a de minimis shareholder will not qualify for 302(b)(1) treatment if the redemption is pro rata with respect to all shareholders (Rev. Rul. 81-289, 1981-2 C.B. 82). Stock Redemptions Incident to Divorce . Usually, property transferred pursuant to a divorce under 1041 results in no income and a carryover basis to the recipient spouse, with the deferred gain (or loss) recognized by the taxpayer upon subsequent disposition of the property. Recent court cases [ Craven v. U.S. , 2002-2 USTC 50,541, 85 AFTR2d 2000-2229, 215 F.3d 1201 (CA- 11, 2000); and Carol M. Read , 114 T.C. 14 (2000)] illustrate the importance of tax planning in divorce proceedings when stock redemptions are involved. In these cases, a wifes stock interest in a jointly controlled corporation was redeemed by the corporation pursuant to a divorce agreement falling within the meaning 1041. agreement falling within the meaning 1041....
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This note was uploaded on 02/04/2009 for the course MGMT 133 taught by Professor Armstr during the Spring '09 term at UC Irvine.

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