Redemption of stock and bonds

Transcription

1 Redemption of stock and bonds Agreement to notify of reacquisition; failure to file. All the taxpayer s stock was redeemed resulting in her son being the sole shareholder. She reported the sale but failed to attach an agreement to notify the Service of a reacquisition within 10 years. The omission was discovered in an audit and the taxpayer filed an amended return attaching such an agreement. The Commissioner contended the agreement was not timely filed and taxed the distribution. Held, the agreement filing requirement is directory rather than mandatory and was satisfied by the taxpayer s substantial compliance. (Secs. 302, 318; 86 Georgie S. Cary, 41 T.C. 214, Nonacq., C.B Agreement to notify of reacquisition; filed by executor. The executor of an estate may file the agreement described in section 302(c)(2)(A)(iii) on behalf of the decedent to qualify a redemption of the decedent s stock that occurred before the decedent s death as a complete termination of interest (Sec. 302, 86 Rev. Rul , C.B Annual voluntary redemption plan. The redemption by a corporation of some of its stock pursuant to an annual redemption is a distribution of property to which sections 302(d) and 301 apply. Shareholders whose proportionate interst in the earnings and profits and assets of the corporation are increased by the redemption are deemed to have received stock distributions to which sections 305(b)(2) and 301 apply , , , , (Secs. 301, 302, 305; 86 Rev. Rul , C.B Appreciated investment distributed. X corporation, engaged in the business of making and holding long-term investments in stock of other corporations, owned 20% of the outstanding stock of Y a corporation it effectively controlled. X s holdings in Y had substantially appreciated in value. Partly due to a contemplated merger of Y and an unrelated corporation, which threatened to divest X of control of the surviving entity, X offered its Y holdings pro rata to its shareholders in redemption of a portion of their X stock. Shareholders owning 35% of X s stock availed themselves of the offer. X made no attempt to sell Y stock. Held, no gain or loss is recognized to X on the distribution of Y stock (Sec. 311, 86 Rev. Rul , C.B Association taxable as corporation. The holder of a minority interest in an association taxable as a corporation withdrew earnings allocated to his capital account. The distribution, approved

2 by the association members, was substantially disproportionate to distributions to other members and reduced his interest by over 20 percent. Held, the distribution, although not fully meeting the provisions of section 302(b)(2) because voting as to management functions was not based on percentage interests, was not essentially equivalent to a dividend. (Sec. 302, 86 Harry F. Cornwall, 48 T.C. 736, Acq., C.B Assumption of liability. For his assumption of a corporate liability owed to a third party creditor, the corporation issued additional stock to the taxpayer. The transaction s purpose was to improve the corporation s balance sheet and it was never intended that the taxpayer would pay the obligation. After the need for an improved balance sheet ended, the corporation distributed debentures in the amount of the liability to taxpayer who transferred them to the creditor and returned the previously issued stock to the corporation. Held, the redemption in which the taxpayer temporarily acquired the corporate debentures was not essentially equivalent to a dividend. (Sec. 302, 86 Joe L. Smith, Jr., 49 T.C. 476, Acq. in result, C.B Bonds; redemption and purchase by corporation. Bond premium arising from redemption and bond discount arising in the same year from purchases of a corporation s own bonds should not be offset; the premium is deductible under section 163 and the gain on the purchases may be excludable under section , 1.108(a)-1, (Secs. 61, 108, 163; 86 Rev. Rul , C.B Bonds exchanged for stock in recapitalization. Where a corporation issued common stock in exchange for and in full redemption of its secured mortgage bonds having an average life of six and one-half years, and unpaid accrued interest thereon, the transaction qualifies as a reorganization (recapitalization), and since such mortgage bonds constitute securities, no gain or loss is recognized to the bondholders from the exchange , (Secs. 354, 368; 86 Rev. Rul , C.B Change in stockholdings and control. Redemption of a portion of an estate s majority interest in a closely held corporation caused the estate to lose actual control of the corporation due to a dispute with certain members of the decedent s family, whose interest was attributed to the estate under section 318. Held, the redemption resulted in a significant reduction in the estate s control over the corporation and was not essentially equivalent to a dividend. (Secs. 301, 302; 86 Arthur H. Squier, 35 T.C. 950, Nonacq., C.B Charitable donation followed by prearranged redemption. A taxpayer with voting control of a corporation and an exempt private foundation who donates shares of the corporation s stock to the foundation and, pursuant to a prearranged plan, causes the corporation to redeem the shares from the foundation does not realize income as a result of the redemption. The Service will treat the proceeds as income to the donor under facts similar to those in Palmer only if the donee is legally bound, or can be compelled by the corporation, to surrender the shares for redemption (Secs. 170, 302, 331; 86 Rev. Rul , C.B. 83; Daniel D. Palmer, 62 T.C. 684, Acq., C.B Checklist for ruling requests. A revised checklist sets forth the information and representations to be included in a request for a ruling under sections 302 and 311 with respect to redemptions of stock. Rev. Proc superseded , (Sec , S.P.R.; Secs. 302, 311, 86 Rev. Proc , C.B Condemnation proceeds in redemption of stock. Where certain amounts representing proceeds from the condemnation of property are distributed in redemption of corporate stock, such distribution does not qualify as a partial liquidation, where the condemnation did not result in a current decrease in corporate business and corporate operations can continue for a considerable period of time at the level maintained prior to condemnation. Since the corporation had accumulated earnings and profits in excess of the amount distributed, the entire amount of the pro rata distribution is taxable as a dividend , (Secs. 301, 346; 86 Rev. Rul , C.B Constructive dividends. All the corporate stock was placed in escrow and the taxpayer purchased one share. The corporation then refinanced its sole asset to obtain funds and redeemed the remaining shares. Held, taxpayer had no unconditional personal obligation to purchase the escrowed shares and the redemption did not result in a constructive dividend. (Secs. 301, 316; 86 Herbert Enoch, 57 T.C. 781, Acq., C.B Constructive dividends. The purchase by a corporation of one shareholder s stock is not a dividend to the remaining shareholders merely because their percentage interests are increased. On the other hand, if such stock is purchased by a remaining shareholder and paid for by the corporation, a dividend results to the purchaser. However, the surrender of stock to a corporation may be a gift or compensation to the remaining shareholders or to the shareholder surrendering the stock depending on whether the stock is surrendered at less than fair market value or more. The Service will follow the Joseph R. Holsey decision (g)-1. (Sec. 115(g), 39 Code; Sec. 302, 86 Rev. Rul , C.B Constructive ownership; estate beneficiary. In the event of a redemption of stock of a corporation where section 318(a) is applied to determine the constructive ownership of stock for purposes of section 302, the beneficiaries proportionate interests in the stock owned by an estate should be determined as of the date of the redemption , (Secs. 302, 318; 86 Rev. Rul , C.B Constructive ownership; family hostility. A corporation, all of the stock of which was owned by three individuals and five trusts, redeemed the stock held by four trusts that were for the benefit of an individual shareholder s children. Before the redemption, each trust owned, actually and constructively, 31 percent of the corporation s stock, and afterwards, each owned 33 percent solely by attribution. Although family hostility prevented the trusts from exercising actual control over such stock, section 318 applies, and the redemption is not a distribution in exchange for stock under section 302(a). The Service will not follow the Robin Haft Trust decision , , , (Secs. 301, 302, 318, 7805; 86 Rev. Rul , C.B Constructive ownership; option not currently exercisable. An option constitutes an option for purposes of section 318(a)(4) of the Code even though it is only exercisable after a Redemption of stock and bonds period of time has elapsed. Rev. Rul clarified , (Secs. 302, 318; 86 Rev. Rul , C.B Contraction of business. Where there is a genuine contraction of the corporate business activity, a distribution by a corporation in complete cancellation and redemption of a portion of its capital stock which does not exceed the net proceeds derived by the corporation from the bulk sales of its inventories is in partial liquidation. To the extent that the amount distributed exceeds the net proceeds from the bulk sale of inventories, such amount is taxable as a dividend. Modified by Rev. Rul (a)-1, (c)-1, (g)-1. (Secs. 115(a), 115(c), 115(g), 39 Code; Secs. 301, 302, 316, 331, 86 Rev. Rul , C.B Contraction of business. Where the termination of all or part of one business of a corporation resulted in a genuine contraction of the corporate business, a distribution by the corporation in redemption of a portion of its capital stock constituted a distribution in partial liquidation to the extent the distribution did not exceed the net proceeds from the sale of the business assets plus that portion of the working capital reasonably attributable to the terminated business activities and no longer required in the operation of the continuing business activities. Rev. Rul modified (Sec. 346, 86 Rev. Rul , C.B Contraction of business; pro rata distribution. Where certain amounts are distributed on a pro rata basis in redemption of stock of a corporation because of a genuine contraction of its business, such redemption constitutes a distribution in partial liquidation of the corporation and is treated as a full payment in exchange for the stock. Clarified by Rev. Rul to provide that the stock surrendered was not traded under circumstances necessary to realistically establish its value by trading price and that the net asset value of the stock realistically reflected its fair market value , , (Secs. 331, 346, 1001; 86 Rev. Rul , C.B. 191; Rev. Rul , C.B Control; de minimus interest. A corporation s redemption of a portion of its stock, not substantially disproportionate, was not essentially equivalent to a dividend under section 302(b)(1) with respect to the small number of shares (several hundred out of a total of 28 million) acquired from a family corporation s wholly owned subsidiary that after the redemption is considered to own 96.7 percent of stock previously owned by virtue of the attribution to it of the small number of shares owned by its parent (Sec. 302, 86 Rev. Rul , C.B Control not reduced by redemption of nonvoting preferred stock and retention of common stock. When a trust directly and by attribution holds common stock and preferred stock and is one of three shareholders capable of forming a control group, a redemption of a portion of the trust s nonvoting preferred stock fails to qualify as a redemption that is not essentially equivalent to a dividend within the meaning of section 302(b)(1) (Sec. 302, 86 Rev. Rul , C.B Control reduced by redemption. The redemption by a corporation of its outstanding common stock that resulted in a 4.73 percent reduction of ownership of stock of a taxpayer who bad previously owned 27 percent of the stock, with the remaining 73 percent being held in equal portions by three unrelated persons, is a meaningful reduction of the taxpayer s interest in the corpora-

3 Redemption of stock and bonds tion and is not essentially equivalent to a dividend, (Sec. 302, 86 Rev. Rul , C.B Controlled corporation; stock for cash; third-tier s stock acquired by first-tier. In a group of domestic corporations, section 304(a)(1) does not apply to the purchase by a wholly owned subsidiary from its wholly owned subsidiary of all the stock of the latter subsidiary s wholly owned subsidiary. Gain or loss is recognized to the selling subsidiary under sections 1001 and , (Secs. 304, 318; 86 Rev. Rul , C.B Corporation; retiring shareholder. A corporation s redemption of its stock from a retiring shareholder results in a constructive dividend to the remaining shareholders only if the redemption is in satisfaction of the primary and unconditional obligation of a remaining shareholder to purchase such stock (Sec. 301, 86 Rev. Rul , C.B Death taxes. Section 115(g)(3) of the 39 Code applies to amounts distributed in redemption of stock, acquired in a nontaxable reorganization effecting a change only in name, state of incorporation, and number of shares of the corporate entity, where the value of the stock of the former corporation was included in the gross estate of the decedent. Any gain or loss realized by the estate upon the redemption of the stock will be treated as a capital gain or loss (g) 1, (b) 1. (Secs. 115(g), 117, 39 Code; Secs. 302, 1202, 86 Rev. Rul , C.B Death taxes; alternate valuation of estate. Stocks of two corporations held by a decedent at date of death are considered separate stock for purposes of the percentage requirements of section 303(b)(2), even though the shares of one corporation are converted into shares of the other in a nontaxable exchange before the alternate valuation date of the estate (Sec. 303, 86 Rev. Rul , C.B Death taxes; attribution rule. The portion of a distribution in redemption of an estate s stock that does not qualify under section 303 as a distribution in full payment in exchange for the stock redeemed does not qualify under section 302(a) and is equivalent to a dividend distribution. Under the attribution rules of section 318 of the Code, the estate is considered to own all the stock of the corporation , , (Sees. 302, 303, 318; 86 Rev. Rul , C.B Death taxes; corporate note. A distribution by a corporation of its own note satisfies the requirement of section 303, concerning distributions in redemption of stock to pay death taxes, that the property must be distributed within three years and ninety days after the filing of the decedent s Federal estate tax return, even though the note will not be paid during that period , (Secs. 303, 317; 86 Rev. Rul , C.B Death taxes; dividends paid; accumulated earnings tax. A distribution in redemption of stock to pay death taxes in 1967 that does not meet the requirements of section 302 or 346 is not treated as a dividends paid deduction in computing accumulated taxable income under section (Sec. 561, 86 Rev. Rul , C.B Death taxes; installment method; closely-held business. An explanation is provided of the application of sections 303 and 6166 when shares of stock are redeemed and an election to pay the estate tax in installments is made. Rev. Rul modified (Secs. 303, 6166; 86 Rev. Rul , C.B Death taxes; installment payments. Application of sections 303 and 6166 where shares of stock in an estate are redeemed in each often consecutive years and an election is made to pay the estate tax attributable to such stock in ten equal installments (Secs. 303, 6166; 86 Rev. Rul , C.B Death taxes; liquidation redemption for greater value; substituted stock redeemed for cash. Determination of the amount qualifying as a redemption to pay death taxes, where the qualifying stock is redeemed for stock and other property in a section 333 liquidation and a portion of the new stock is redeemed for cash (Sec. 303, 86 Rev. Rul , C.B Death taxes; percentage requirements; unexercised power of appointment. Determination of the number of shares of stock of a predeceased wife s estate considered owned by a husband s estate for purposes of meeting the percentage requirements of section 303 where he died before distributions were made to him and before exercising his power of appointment (Sec. 303, 86 Rev. Rul , C.B Death taxes; series of stock redemptions. Where several distributions in redemption of stock are made within the statutory period specified in section 303(b)(1)(A) each may qualify as a distribution in redemption of stock to pay death taxes (Sec. 303, 86 Rev. Rul , C.B Death taxes; stock owned by estate; related corporations. Application of section 304(a)(1) and 303 to the acquisition by one corporation of another corporation s stock from a decedent s estate, where the stock of both corporations was owned by the decedent and family members who were the sole beneficiaries , (Secs. 303, 304; 86 Rev. Rul , C.B Death taxes; timeliness of distribution. A distribution to pay death taxes which otherwise qualifies under section 303(a) will be timely where a petition for redetermination of a deficiency in the Federal estate tax has been filed with the Tax Court within the time prescribed in section 6213 and the distribution is made more than 60 days after the decision of the Tax Court becomes final, but prior to the expiration of the period prescribed in section 303(b)(1)(A) (Sec. 303, 86 Rev. Rul , C.B Death taxes; timeliness of distribution. A redemption of stock included in a decedent s gross estate made more than three years and 90 days after the return was filed, but within three years and 90 days from the date the return was required to be filed, meets the requirements of section (Sec. 303, 86 Rev. Rul , C.B Death taxes; timely distribution; delinquent return. A distribution in redemption of stock to pay death taxes meets the requirements of section 303(b)(1)(A) if made within three years and ninety days after the filing of a Federal estate tax return that was filed after the due date (Sec. 303, 86 Rev. Rul , C.B Death taxes; two or more corporations; section 331(a) distribution. An estate received a liquidating distribution under section 331(a) that would have qualified under section 303 if not for the requirements of section 303(b)(2)(A). The estate later received a distribution from a wholly owned corporation that met the requirements of section 303. The value of the gross estate included more than 75 percent of the value of the outstanding stock of each corporation. The special rule of section 303(b)(2)(B) is not elective, and the first distribution must be applied against the section 303(a) limitation (Sec. 303, 86 Rev. Rul , C.B Debentures; subordinated; repayment. Subordinated debentures issued under collateral and cash agreements by member organizations of the New York Stock Exchange to maintain the required debt-to-capital ratio constitute valid indebtedness. The amounts, other than principal, paid under the cash agreements and the interest paid on the indebtedness are deductible by the organizations under section 163. Amounts paid to the lender for the use of the collateral are deductible under section 162. Income from the pledged collateral is includable in the lender-owner s gross income and sale of the collateralized securities results in a recognized gain or loss. Distinguished by Rev. Rul , , , (Secs. 61, 162, 163, 302; 86 Rev. Rul , C.B Distribution; termination of trust interest. Distributions to a trust in redemption of a corporation s stock as the first step in an integrated plan to eliminate the trust as a stockholder represented, in substance as well as form, the purchase price for stock, not payment of taxable dividends. (Sec. 115(g), 39 Code; Sec. 302, 86 James A. Kenyon, 26 T.C. 846, Acq., C.B Distributions in full payment under section 303. A redemption of stock not actually owned by a decedent at death does not qualify under section 303 even though such stock is included in the decedent s gross estate by reason of section 2035(a) and (d)(3)(a). However, such stock included in a decedent s gross estate is taken into account in determining satisfaction of the percentage requirements of section 303(b) (Sec. 303, 86 Rev. Rul , C.B Distributions under will; specific monetary bequest. Section 303 is not applicable to the redemption of stock acquired in satisfaction of a specific monetary bequest if the executor does not have discretionary power under the will to distribute assets in kind (Sec. 303, 86 Rev. Rul , C.B Dividend; corporate payments on mortgage to former owner. Taxpayers purchased some outstanding corporate stock. In exchange for notes secured by a second mortgage, the remaining stock was redeemed by the corporation and pledged as further security.

4 determining the pro rata portion of the total earnings and profits attributable to shares redeemed during a taxable year in a situation in which the current year s earnings and profits exceed the ordinary distribution made and in a situation in which the opposite occurs , (Secs. 312, 316; 86 Rev. Rul , C.B Dividend; paid in same year; earnings and profits. When both ordinary distributions under section 301 and redemption distributions under section 302 are made during the same taxable year and the combined distributions exceed earnings and profits for the year, the ordinary distributions take priority in determining current earnings available for dividends. Only current earnings in excess of the ordinary distributions are treated as available for redemption distributions , , (Secs. 301, 312, 316; 86 Rev. Rul , C.B Dividend; surviving stockholders. The five shareholders entered into an agreement whereby, upon the death of a shareholder, the surviving shareholders would purchase the decedent s stock at book value. The survivors exercised their rights and immediately transferred the stock, for the same price paid the decedent s estate, to the corporation which held the shares in treasury for sale to key employees. Held, the payments made by the corporation to the survivors for the stock were not essentially equivalent to dividends. (Sec. 115(g), 39 Code; Secs. 301, 302, 86 John A. Decker, 32 T.C. 326, Nonacq., C.B. xxvi Earnings and profits; capital account computations. For purposes of determining the portion of a redemption distribution described in section 302(b) that is properly chargeable to the capital account of a corporation incorporated after March 1, 1913, the ratio between the charge to capital and the capital prior to retirement is the same as the ratio between the number of shares retired and the number of shares outstanding prior to retirement, and the balance of the redemption distribution is charged to earnings and profits. Rev. Rul revoked , , , (Secs. 302, 303, 312, 316; 86 Rev. Rul , C.B. 133; William D.P. Jarvis, 43 B.T.A. 439, Nonacq. withdrawn and Acq. substituted; Ronald D. Anderson, 67 T.C. 522, Acq., C.B Earnings and profits computation. The portion of a distribution in redemption of stock that is properly chargeable to the capital account and not treated as a distribution of earnings and profits includes not only the allocation portion of the capital paid in for stock at its tax basis but also the pro rata share of the other attributes including unrealized appreciated corporate surplus. (Secs. 302, 303, 312, 316, 346, 562; 86 William D.P. Jarvis, 43 B.T.A. 439, Nonacq.; Woodward Investment Co., 46 B.T.A. 648 and F & R Lazarus & Co., 1 T.C. 292, Acqs. in result, C.B. xx-xxii; Herbert Enoch, 57 T.C. 781, Nonacq., C.B Exchange for real property; basis. In accordance with a prearranged agreement, a corporation redeems its stock by distributing in exchange for the stock real property with a fair market value equal to the value of the stock. The corporation then repurchases the real property for cash. Substance rather than form controls, and cash rather than real property is regarded as having been distributed by the corporation in redemption of its stock. The basis of the real property will be the same as it was in the hands of the corporation prior to the distribution (Sec. 1012, 86 Rev. Rul , C.B Exchange for real property; termination of interest. Distribution to a shareholder of real estate formerly leased by a corporation from its liquidated subsidiary in complete redemption of all of his stock then leased back by the corporation under a bona fide five-year lease at a fair rental value, completely terminates the shareholder s interest in the corporation within the meaning of section 302(b)(3). After the redemption of the stock, the relationship between the parties was merely that of landlord and tenant (Sec. 302, 86 Rev. Rul , C.B Exchange of debenture and stock for outstanding stock. The issuance by a corporation of debentures and common stock in exchange for its outstanding preferred stock, the aggregate fair market value of the former being greater than the fair market value of the latter, does not give rise to bond discount. Payments of fees to underwriters in effecting the exchange constitute capital expenditures, with the portion attributable to the debentures being amortizable proportionately over their term , 1.263(a)-1. (Secs. 162, 263; 86 Rev. Rul , C.B Exchange of debentures for preferred stock; amortization of discount. A corporation that exchanges, in a recapitalization, $50 face value five percent debentures for its out standing $50 par value preferred stock having a claimed market value of $33 per share on the date of the exchange does not incur amortizable bond discount deductible under section 163(a) (Sec. 163, 86 National Alfalfa Dehydrating and Milling Co., 417 U.S. 134, Ct. D. 1964, C.B Exchange of debentures for stock and debentures. A corporation s issuance of new debentures in exchange for its outstanding debentures and preferred stock under a plan of recapitalization qualifies as a reorganization, even though continuity of proprietary interest is not maintained. The transaction does not give rise to original issue discount on the new debentures, and the exchange of new debentures for the stock is treated as a distribution in redemption of the shareholders stock , (Secs. 368, 1232; 86 Rev. Rul , C.B Foreign subsidiary stock to domestic shareholder; redemption by subsidiary. Transactions in which a domestic parent pursuant to a plan redeemed all of its shares held by an individual shareholder in exchange for shares of its wholly owned foreign subsidiary which then redeemed for cash all of its stock held by the individual must be treated as though the subsidiary made a cash distribution, taxable as a dividend, to the parent in exchange for part of its stock held by the parent and then as a cash redemption by the parent of the shares held by the individual, after which the individual had no interest in either company. Rev. Rul clarified , (Secs. 301, 302; 86 Rev. Rul , C.B French bonds acquired in exchange. An exchange in 1945 by an American investor of marketable French bonds of 1917 and 1918 for new marketable bonds of 1945 constituted a closed transaction on which gain or loss was recognized. The basis of the new bonds is their fair market value at the date of exchange and gain or loss upon subsequent sale or redemption is measured by the difference between such basis and the Redemption of stock and bonds amount realized (a)-1. (Sec. 112(a), 39 Code; Sec. 1002, 86 Rev. Rul , C.B Installment payment; debentures. Taxpayer acquired discounted registered debentures which were redeemable in annual installments. The bonds were subsequently redeemed prior to maturity for full face value. Held, the portion of taxpayer s gain that was attributable to payments due at the time of redemption was taxable as capital gain, not interest. (Sec. 117(f), 39 Code; Sec. 1232, 86 Eli D. Goodstein, 30 T.C. 1178, Nonacq., C.B Installment payments; preferred stock. A corporation redeemed all the preferred stock from a decedent s estate under an agreement providing consideration for accrued and unpaid dividends which had never been formally declared. Held, although a portion received under the agreement actually was measuredly an allowance for accrued and unpaid dividends, such amounts were not dividends taxable as ordinary income but were part of the overall purchase price of a valid redemption contract resulting in a complete termination of the shareholder s interest and qualify for capital gains treatment. (Sec. 302, 86 Oscar L. Mathis, 47 T.C. 248, Acq., C.B Installment sale; payment in trust. A cash method taxpayer received 25 percent of the redemption price of corporate stock in cash in the year of redemption. The balance was placed in trust to protect the corporations from undisclosed liabilities or agreements and was subsequently paid to the taxpayer over several years. The taxpayer did not constructively receive the trust funds or a beneficial interest in the funds in the year of sale, and the redemption qualifies as an installment sale under section 453. (Secs. 451, 453; 86 Fred M. Stiles, 69 T.C. 558, Acq., C.B Intercompany dividend; computation of consolidated taxable income. The receipt of cash by a common parent corporation from its subsidiary during a consolidated return period, in redemption by the subsidiary of all its preferred stock all of which is held by the parent corporation, constitutes an intercompany dividend to be eliminated in computing the consolidated taxable income. The parent s adjusted basis for the subsidiary s preferred stock will be transferred to and allocated ratably among the shares of the subsidiary s common stock owned by the parent at the time of the redemption , , , , A. (Secs. 301, 302, 316, 317, 1502; 86 Rev. Rul , C.B Liquidation-reincorporation. A shareholder in a liquidation-reincorporation should be afforded capital gain treatment on the receipt of a liquidation distribution from the old corporation if more was invested in the new corporation than was received from the old or the percentage of stock ownership in the new corporation was reduced to such an extent in comparison with the percentage of ownership in the old that the transaction was a substantially disproportionate redemption. (Secs. 331, 346; 86 Joseph C. Gallagher, 39 T.C. 144, Acq. in result, C.B Loan to shareholder to enable corporation to purchase stock. As a result of disputes among the shareholders, it was agreed that the corporation would buy all the stock except for that held by the taxpayer. The bank required the taxpayer s name as buyer of the stock before granting the corporation a loan. Held, taxpayer did not receive a constructive dividend; the form of the

5 Redemption of stock and bonds transaction was the purchase of stock by the corporation through the taxpayer as its agent. (Sec. 301, 86 Frank Ciaio, 47 T.C. 447, Acq., C.B Majority interest acquired through minority shareholder as conduit. Taxpayer, a minority shareholder in a closely-held corporation, wanted it to purchase the stock of the majority stockholder who feared involvement in creditor s claims should corporate capital become impaired and insisted the record show that the taxpayer purchased his interest. In a series of transactions, the corporation borrowed secured funds then drew a check in favor of the taxpayer who deposited the check in his account and drew a certified check for the net purchase price of the stock. The corporation canceled the certificates for the purchased stock and issued one certificate to the taxpayer, then immediately canceled and redeemed that certificate. Held, the taxpayer was never obligated to pay for the stock, nor did he acquire any beneficial ownership but acted only as a conduit or agent for the corporation, and did not receive a distribution essentially equivalent to a dividend. (Secs. 301, 302; 86 Richard B. Bennett, 58 T.C. 381, Acq., C.B Merger with transitory corporation; minority stockholders eliminated. The creation, by the majority shareholder of a corporation, of a second corporation followed by a merger of the second corporation into the first with the majority shareholder receiving stock of the second corporation and the minority shareholders receiving cash for their shares, is disregarded and the cash received by the minority shareholders is subject to the provisions and limitations of section (Sec. 302, 86 Rev. Rul , C.B Minority stockholder. Amounts received by minority stockholders in redemtpion of a portion of their stock in the corporation is not deemed essentially equivalent to a dividend but constitute amounts received in exchange for such stock to the extent of the fair market value thereof. The difference between the adjusted basis of the stock redeemed and the consideration received therefor, to the extent that the consideration received is not greater than the fair market value of such stock at date of redemption, constitutes capital gain or loss (Sec. 302, 86 Rev. Rul , C.B Newly issued nonvoting stock; redemption to pay death taxes. Section 303(a) of the Code applies to a distribution of cash by a corporation to an estate in redemption of the corporation s nonvoting stock that is newly issued to its shareholders as part of the same transaction. The issuance of that stock is tax-free to the redeemed shareholder under section 305(a). Rev. Ruls and distinguished , (Secs. 303, 305, 86 Rev. Rul , C.B Open-end investment company; participating agreements representing stock. Investment units, into which 10-year participating agreements sold by an open-end regulated investment company are subdivided and which determine the number of votes each investor possesses, his ratable share of the fund s profits, and his ratable share of its assets upon liquidation or complete redemption, represent stock in the fund, and withdrawals that an investor is permitted to make are treated as redemptions of his stock , (Secs. 302, 851; 86 Rev. Rul , C.B Original issue discount. Unearned original issue discount received upon redemption of corporate debentures before maturity is gain from the sale or exchange of a capital asset. The portion of the gain represented by the discount that is attributable to the period during which the debentures were actually outstanding is interest earned to the date of redemption and is taxable as ordinary income (Sec. 1232, 86 Ted Bohrick, 44 T.C. 245, Acq., C.B Parent s stock purchased by subsidiary; basis. The purchase of a parent corporation s stock from its sole shareholder by its subsidiary will not result in a constructive distribution to the parent, but the amount received by the sole shareholder is a constructive dividend. The parent s adjusted basis in the subsidiary s stock will remain the same as it was prior to the transaction, and the subsidiary will have a basis in the parent s stock acquired in the transaction equal to the amount paid , (Secs. 304, 1012; 86 Rev. Rul , C.B. 94; Rev. Rul , C.B Partial; control not surrendered. A corporation purchased and retired shares of stock held by a stockholder, who continued to hold the majority of its stock. The transaction was made to enable an employee to increase his holdings to equal a one-third interest in the corporation. The distribution and redemption of the stock was held to be essentially equivalent to a dividend , , (Secs. 301, 302, 316; 86 Rev. Rul , C.B Partial; meaningful reduction of interest. The redemption by a corporation of shares of its voting common stock (the only class of stock outstanding) that reduces a shareholder s interest from 90 percent to 60 percent is not a meaningful reduction of that shareholder s interest, and does not qualify as a distribution not essentially equivalent to a dividend within the meaning of section 302(b)(1), and, therefore, is not a distribution in exchange for the stock under section 302(a) , (Secs. 301, 302; 86 Rev. Rul , C.B Partial distribution of assets to form new corporation. In order to remove certain legal restrictions on one of two businesses it operates, a corporation distributed all of the assets of that business in partial redemption of its stock to its two shareholders who, pursuant to an integrated plan, organized a new corporation to receive the assets and operate the business. The transaction is a reorganization under sections 368(a)(1)(D) and 355 and is not taxable as a partial liquidaton , , , (Secs. 331, 346, 355, 368; 86 Rev. Rul , C.B Partial liquidation; contraction of business; non pro rata distribution. A distribution that otherwise qualified as a distribution in partial liquidation under section 346(a)(2) (predecessor to sections 302(b)(4) and 302(e)(1)) is not disqualified for treatment under section 346(a)(2) because the distribution was made non pro rata , (Secs. 302, 346; 86 Rev. Rul , C.B Partial liquidation; delayed distribution. A corporation that adopted a plan to sell a manufacturing division and use the proceeds to redeem part of its stock, but delayed distribution of the proceeds by transferring them to a special investment account until the second taxable year after adoption of the plan, has not made a distribution in partial liquidation within the meaning of section 346(a)(2) even though the requirements of section 346(b) are met , (Secs. 331, 346; 86 Rev. Rul , C.B Partial liquidation; payments on note assigned to shareholders. The assignment by a corporation to its shareholders of the right to receive payments on a note received by the corporation from the purchaser of part of its business in a transaction qualifying as a partial liquidation under section 346(a)(2) is a distribution of the proceeds of the partial liquidation (Sec. 346, 86 Rev. Rul , C.B Partial liquidation; pro rata distribution and shareholder surrender of stock. A redeemed shareholder need not surrender stock in order for a pro rata distribution in partial liquidation to qualify as a redemption under section 302(b)(4) and (e). Rev. Ruls and 81-3 obsoleted , (Secs. 302, 346, 86 Rev. Rul , C.B Partial liquidation; proceeds from redemption of cooperative stock. Common stock that a corporation held in a cooperative to enable it to purchase products for resale and receive business-related services from the cooperative, and that was not entitled to dividends and could not be redeemed for more that its par value purchase price, was held for business and not for investment purposes. The corporation s distribution of the net proceeds from redemption of such stock in redemption of part of the corporation s stock under a plan of partial liquidation qualifies as a distribution in partial liquidation under section 346(a)(2). Rev. Rul distinguished (Sec. 346, 86 Rev. Rul , C.B Preferred stock. A proposed redemption by a corporation purchasing certain shares of its preferred stock to equalize the preferred stockholdings of two shareholders pursuant to a prior agreement will constitute a distribution in full payment in exchange for the stock. (Secs. 302, 311; 86 Rev. Rul , C.B Preferred stock. The redemption of all the preferred stock of a corporation held by a stockholder, who also held all of the outstanding common stock of the corporation, is treated as a dividend , , (Secs. 301, 302, 316; 86 Rev. Rul , C.B Preferred stock. A corporation redeemed all of its outstanding preferred stock which was held by three shareholders. As a result, one of the three, who owned all of the common stock, became the sole shareholder. Inasmuch as the redemption did not affect the voting control of the corporation or other essential relationships between it and the shareholders, the redemption was equivalent to a distribution of a dividend to the owner of the common stock and a distribution in full payment in exchange for the preferred stock of the other two , (Secs. 301, 302; 86 Rev. Rul , C.B Preferred stock. The redemption by a corporation of any of its nonvoting, nonconvertible, nonparticipating preferred stock, which is not section 306 stock and all of which is owned by an individual who owns none of the corporation s common stock either directly or by attribution, qualifies as not essentially equivalent to a dividend. Clarified by Rev. Rul (Sec. 302, 86 Rev. Rul , C.B Preferred stock; accrued dividends. The amount included in a redemption payment for

6 Redemption of stock and bonds preferred stock that represents a quarterly dividend, for which funds had been set apart but that had not been declared and remained unpaid after payment of common stock dividends for the same period, is reportable as dividend income by the shareholders. However, the amount that represents a further accrued dividend to the redemption date one month later is considered payment for the stock redeemed , (Secs. 301, 302; 86 Rev. Rul , C.B Preferred stuck; accrued dividends and interest. The total amount paid by a corporation in redemption of its preferred stock, including the amount designated as accrued and unpaid dividends or the amount designated as interest, is considered as received in full payment in exchange for the stock surrendered. Gain or loss is realized by each shareholder measured by the difference between the total amount paid in exchange for the stock and the cost or other basis of such stock. S.M superseded (Sec. 302, 86 Rev. Rul , C.B Preferred stock; accrued dividends, premium, and expenses. Dividend arrearages paid upon redemption of preferred stock are chargeable to earnings and profits. However, the costs of redemption, including any premium paid and expenses incurred in connection with the redemption, are not chargeable to earnings and profits but are properly chargeable under section 312(e) to the capital account. Modified by Rev. Rul , (Secs. 302, 312; 86 Rev. Rul , C.B Preferred stock; issued in lieu of notes. A bank made loans to a corporation s shareholders who used the loans to improve their corporation s financial position by paying off current liabilities. The bank required that these loans be subordinate to subsequent loans it made to the corporation. The shareholders transferred the funds to the corporation in exchange for preferred stock which was redeemed as the corporation s financial position improved. Held, the redemption was not essentially equivalent to a taxable dividend. (Sec. 115(g), 39 Code; Sec. 302, 86 G. E. Nicholson, 17 T.C. 1399, Acq., C.B Preferred stock; substantially disproportionate; no common stock. A redemption of voting preferred stock without a reduction in a shareholder s ownership of the common stock may qualify as a substantially disproportionate redemption if the shareholder owns no common stock either directly or constructively. Rev. Rul clarified (Sec. 302, 86 Rev. Rul , C.B Preferred stock; substantially proportionate. A distribution in redemption of all classes of preferred stock in a family corporation, where such preferred stock is exchanged for common stock of another corporation, is essentially equivalent to a dividend, since the proportionate interests of each of the family groups were not substantially changed by the redemption, rather than an exchange of stock, upon which gain or loss may be recognized , (Secs. 302, 311; 86 Rev. Rul , C.B Preferred stock and the stock-for-debt exception. Where a debtor corporation that is under the jurisdiction of a court in a case under title 11 of the United States Code, issues preferred stock in exchange for its outstanding indebtedness, the stock-for-debt exception can apply only to the extent of the redemption price and liquidation preference of the preferred stock (Secs. 61, 108; 86 Rev. Rul , C.B Preferred stock that is section 306 stock; computation of earnings and profits. The charge to earnings and profits computed under section 312(a) on the redemption under section 303 of section 306 stock is subject to the limitation of section 312(e). Therefore, a portion of the redemption price must be allocated to the capital account. Rev. Rul modified , , (Secs. 303, 306, 312; 86 Rev. Rul , C.B Premium; convertible preferred. Shareholders of an acquired corporation in a statutory merger, who received for each share of their common stock an equal value share of the acquiring corporation s new convertible preferred stock, callable after 5 years at a redemption premium of approximately 83 percent of issue price if the common stock into which the preferred can be converted has a market value at least 25 percent greater than the call price, need not include the premium in their gross income (Sec. 305, 86 Rev. Rul , C.B Premium; newly created preferred. When a class of preferred stock created for issuance in a reorganization between two widely held corporations is intended to have a 10 percent redemption premium, but as a result of an unanticipated market fluctuation it actually has a redemption premium over 10 percent of the issue price, the difference between the redemption price and issue price is a reasonable redemption premium for purposes of section 305(b)(4) and (c) and not a distribution of property (Sec. 305, 86 Rev. Rul , C.B Premium; nonconvertible preferred. Section 421(b)(4) of the Tax Reform of 1969, which provides that section 305(b)(4) will not apply to certain actual and deemed distributions with respect to preferred stock, is not applicable to deemed distributions on nonconvertible preferred stock issued in a reorganization after January 10, 1969, even though such stock was authorized and in part issued prior to that date and part of the stock issued in the reorganization was the stock meviously issued and reacquired and held in its treasury (Sec. 305, 86 Rev. Rul , C.B Premium; paid on call of debt obligation; deductibility. Reasonable amounts paid by a corporation on the call of its convertible debt obligations in excess of the normal premium may be deducted as business expenses if the call was made, or a binding obligation to repurchase at a specified call premium was entered into, before April 23, The Roberts & Porter, Inc. decision followed. Rev. Ruls and revoked , (Secs. 163, 249; 86 Rev. Rul , C.B Premium; preferred. The otherwise reasonable redemption premium on the preferred stock of the acquiring corporation, issued to the shareholders of the acquired corporation in a merger, that fails to meet the 10-percent limitation of reg (b)(2) due solely to external market conditions affecting the fair market value of the acquired corporation s stock after a qualifying exchange ratio has been determined but before the exchange, is treated as a reasonable redemption premium, and not as a taxable distribution of property (Sec. 305, 86 Rev. Rul , C.B Property distributed; liabilities in excess of basis. Computation of gain to be recognized on a corporation s distribution of property with respect to its stock is made on an individual, asset-by-asset basis rather than on an aggregate basis. This application is illustrated by various situations in which such distributions are made in comupete termination of a shareholder s interest in the corporation (Sec. 311, 86 Rev. Rul , C.B Recapitalization; excess redemption premium; preferred stock. In a recapitalization where a corporation issues preferred stock that must be redeemed at the time of the holder s death at a price in excess of one hundred and ten percent of the issue price, the amount of the excess redemption premium is treated under section 305(c) as a distribution of stock within the meaning of section 305(b)(4). The redemption amount will be constructively received ratably over the holder s life expectancy (Sec. 305, 86 Rev. Rul , C.B Registered subordinated debentures; repayment. Registered subordinated debentures issued by a member firm of the New York Stock Exchange represent, under the circumstances, a valid indebtedness for income tax purposes. Interest paid or accrued on the debentures is allowable as a deduction, and repayment of the debentures will not be treated as distributions with respect to stock or redemptions of stock. Distinguished by Rev. Rul , , (Secs. 163, 301, 302; 86 Rev. Rul , C.B Related corporations. Two individuals, each of whom owned half the stock of two corporations and one-third of the stock in a third, sold part of their stock in the two corporations to the third corporation for cash and promissory notes pursuant to an agreement that results in their holding equal interests in each of the three corporations. The acquisition by the third corporation of the stock of the other two corporations are redemptions of stock, which were substantially disproportionate as to the sellers, and to the extent the consideration received by each seller is not greater than the fair market value of his stock of each corporation gain resulting from the exchange is capital gain (Sec. 304, 86 Rev. Rul , C.B Related corporations; attributionof-ownership rule; dividend equivalency. A meaningful reduction in a shareholder s interest, after applying the attribution-of-ownership rules, is the controlling factor in determining whether a stock redemption is not essentially equivalent to a dividend under section 302(b)(1); the business purpose of the transaction is irrelevant in determining dividend equivalency , , (Secs. 302, 316, 318; 86 Davis, 397 U.S. 301, Ct. D. 1937, C.B Related corporations; attribution ownership of controlling interest. The redemption of an estate s 250 shares of common stock by a corporation, whose remaining 1,500 shares of such stock are equally divided between the estate s sole beneficiary and an unrelated individual, constitutes a meaningful reduction of the estate s interest and is not essentially equivalent to a dividend under section 302(b)(1) (Sec. 302, 86 Rev. Rul , C.B Related corporations; control; value test. In determining whether the control requirement of section 304(a)(1)(A) of the Code is met, the value test of section 304(c)(1) is not applied class-by-class, but is applied to the aggregate of all