from shareholder or vice versa, the attribution rules are also applied to determine whether the shareholder satisfies the threshold (i.e. actual and constructive ownership taken into account for threshold requirement. §1.318-1(b)(2) §301(b)(1) Not Essentially Equivalent to a Dividend Testing: Davis : A redemption must result in a meaningful reduction of the shareholder’s proportionate interest in the corporation For a sole shareholder; this type of reduction will not result unless a complete termination occurs Standard: o Adequate loss where shareholder continued to hold 50% if this caused shareholder to hold less than necessary for significant corporate events o Small Shareholders: participation in redemption that is pro rata will result in dividend treatment Majority Shareholders: o Rev Rul 78-401: Reduction from 90 to 60% was not meaningful because there was still control o Rev Rul 75-502: Reduction from 57% to deadlock at 50% was meaningful because it majority control to deadlock with the owner Minority Shareholder: o Losing influence as a swing voter can be meaningful o Redemption of a few shares in large, publicly traded corporation will be meaningful since shareholder has no control Nonvoting Shareholder: o Redemption of 5% of preferred who only owns nonvoting is an exchange because common shareholders increase their ownership at the cost of the preferred shareholder o Redemption of preferred by shareholder who owns common and preferred is not meaningful §302(b)(2) Safe Harbor – “Substantially Disproportionate” Shareholders will receive exchange treatment if: Shareholder retains less than 50% of voting power after redemption Stock Owned After/Outstanding is less than 80% of the Stock Owned/Outstanding (Before) Anti-abuse provision: Safe Harbor is inapplicable if the redemption is made under a plan with a purpose or effect of a series of redemptions that result in a distribution (in the aggregate) that is not substantially disproportionate. o Aggregates series of related redemptions to satisfy tests Multiple Stock Classes: §1.302-3 “Preferred Piggyback” as long as a shareholder is redeeming both voting and nonvoting and satisfies test as to voting stock, the nonvoting will get exchange treatment as well No safe harbor for only nonvoting The Big Picture: Serial Redemptions and Step Transactions 10
Overall results of related transactions should be considered when characterizing redemptions Redemptions from the Corporation’s Perspective – Partial Liquidation under §302(c)(4): Non-corporate shareholders can receive exchange treatment on a redemption of stock in the case of a partial liquidation of the corporation Tested from the Corporations’ perspective §302(e) Partial liquidation defined. (1) In general.-- For purposes of subsection (b)(4), a distribution shall be treated as in partial liquidation of a corporation if-- (A) the distribution is not essentially equivalent to a dividend (determined at the corporate level rather than at the shareholder level), and
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- Spring '14