LLM - Corporate Tax Instructor: Dwight Drake Marital Dissolution Stock Redemption C Corp Spouse A Spouse B Divorce Decree Sells Stock Cash or Property Constructive dividend

LLM - Corporate Tax Instructor: Dwight Drake Final Regs Under 1041 Issue: If redemption part of divorce, what is relationship of 1041 (no gain or loss on divorce property division) and 302 redemption provisions? Reg (c) If redemption for benefit of non-transferring spouse under “primary and unconditional” obligation standard, then: - No gain or loss to transferring spouse per Constructive dividend to non-transferring spouse. If “primary and unconditional standard not met for constructive dividend, then 1041 not apply and transferring spouse must recognize gain or loss. Parties may elect opposite rule to one that would otherwise apply if they both agree. Bottom line: No opportunity to whipsaw and both avoid tax.

LLM - Corporate Tax Instructor: Dwight Drake Problem 287 Basic Facts: P owns 25k of F Corp 100k outstanding common shares. FMV stock 2.5 mill ($100 per share) ; basis 25k. Mucho E & P. F Corp has right of first refusal. P wants to give 100k to alma mater SU. (a)F Corp distributes 100k to P in redemption of 1000 shares; P gives cash to SU. 100k dividend because not qualify under 302(b) series. P has 100k dividend income and 100k charitable contribution, subject to 170 deduction limitations. (b)P gifts 1000 shares to SU and F Corp redeems from SU for 100k two months pursuant to oral understanding. SU under no obligation. If no obligation (just oral understanding), no constructive dividend to P per Grove and Rev. Rule P has 100k charitable contribution deduction and no income. (c)Same, except P gives 250 shares a year for four years and SU always redeems. Still OK under Grove if SU not obligated, but pattern is riskier – suggests deal.

LLM - Corporate Tax Instructor: Dwight Drake 304 – Brother-Sister Redemptions A Corp B Corp Common Owner 50% of both B Corp Stock Cash or Property 304 impact: - A redemption tested by B ownership % change. - If 301 distribution, first A E&P, then B E&P. - If 301 distribution, deemed 351 transfer to A, followed by A redemption of hypothetical shares trumps 351 boot rule if stock and property actually transferred by A. Not so for acquisition debt. - Corporate 50% 318 factor reduced to 5%.

LLM - Corporate Tax Instructor: Dwight Drake 304 – Parent-Sub Redemptions A Corp B Corp Stock Owner B Corp Stock Cash or Property 304 impact: - A redemption tested by B ownership % change. - If 301 distribution, first A E&P, then B E&P trumps 351 boot rule if stock and property actually transferred by A. Not so for acquisition debt. - Corporate 50% 318 factor reduced to 5%. 50% owned 50% Owned

LLM - Corporate Tax Instructor: Dwight Drake Problem 299-2(a) B Corp 20 Shrs O 100 Shrs OS No E&P 80 Shrs B, 40k Basis 60 Shrs O, 9k Basis O Corp 100 Shrs OS 5k E&P C 4k Cash (a)C sells 20 O Corp shares (basis 3k) to B Corp for 4k. - Since C has control of both corps (at least 50% voting), 304(a)(1) treats as constructive redemption of B corp stock tested by C’s holding in O Corp stock. Percentage in O Corp 60% before and 56% after (40 direct and 16 via B Corp). Hence, C deemed to have received 301 distribution from B Corp. - Distribution first out of B Corp E&P (0), then O Corp E&P. Hence, 4k dividend under 301. O Corp E&P reduced to 1k. - C basis in B Corp stock increase 3k (basis in O corp transferred shares) to 43k, as if 351 transaction. B corp basis in O Corp transferred stock 3k (transferred basis) per 362, as if 351 transaction.

LLM - Corporate Tax Instructor: Dwight Drake Problem 299-2(c) B Corp 20 Shrs O 100 Shrs OS No E&P 80 Shrs B, 40k Basis 60 Shrs O, 9k Basis O Corp 100 Shrs OS 5k E&P C 3k Cash 1 B Shr (c) C sells 20 O Corp shares (basis 3k) to B Corp for 3k cash and I share B stock (FMV 1k). - Since C has control of both corps (at least 50% voting), 304(a)(1) treats as constructive redemption of B corp stock tested by C’s holding in O Corp stock. C would like to claim straight 351 deal with 3k boot and 1k gain (4k minus basis of 3k. Not so because 304(b)(3)(A) says 351 applies only to stock-for-stock portion of exchange, not boot. 304(a) governs boot. - Here 3k deemed redemption of B Corp stock tested by C’s holdings in O Corp. As in (a), clear 301 dividend of 3k, which reduce O Corp E&P.

LLM - Corporate Tax Instructor: Dwight Drake Problem 299-2(d) B Corp 20 Shrs O 100 Shrs OS No E&P 80 Shrs B, 40k Basis 60 Shrs O, 9k Basis O Corp 100 Shrs OS 5k E&P C 1 B Shr 3k Debt d) C sells 20 O Corp shares (basis 3k) to B Corp for 1 share B stock (FMV 1k) and O Corp takes stock subject to 3k debt C incurred to buy stock (b)(3)(B) exception says 304(a) not apply to liability assumed or taken subject to in 351 transaction if liability incurred by transferor to acquire stock. - So here straight 351 transaction. Per 357, liability transfer does not trigger any gain or loss (not in excess of basis). C basis in 1 share of B Corp stock received is zero (3k basis in O Corp stock transferred less 3k debt transferred) per 358(d).

LLM - Corporate Tax Instructor: Dwight Drake Problem 299-2(b) B Corp 60 Shrs O 100 Shrs OS No E&P 80 Shrs B, 40k Basis 60 Shrs O, 9k Basis O Corp 100 Shrs OS 5k E&P C 12k Cash (b) C sells all 60 O Corp shares (basis 3k) to B Corp for 12k cash. - Since C control both (50% plus voting stock), deemed redemption from B Corp to C tested against O Corp’s percentages before and after. Before percentage was 60%; after is 48% (attribution from B Corp). No hope under 302(b)(2) because not less than 80%. May have good (b)(1) “not essentially equivalent to dividend” argument because now under 50%. Query impact of B Corp (controlled by C) controlling now O Corp. Does this wipe out (b)(1) hope? Probably not. - If valid exchange, not 301 dividend, C has 3k LTCG (12k minus 9k basis). C’s B corp basis not effected.

LLM - Corporate Tax Instructor: Dwight Drake 303 Redemption Purpose: Permit exchange treatment on redemption of stock included in dead person’s estate that otherwise would be 301 dividend distribution to pay estate and inheritance taxes and funeral and administrative expenses. Requirements: - Timing: Pay within 90 days of estate tax assessment period, 60 days after Tax Court determination, of 6166 installment period. Distributions after 4 yrs limited to lesser of unpaid qualified items just before distribution or qualified items paid within one year of distribution. - 35% Test: FMV of stock must exceed 35% of gross estate less 2053 and 2054 deductions (debts, expenses and losses). - If own 20% or more of multiple corps, can aggregate for 35% test. Spouse’ interest in community property or jointly owned stock included for 20% test but not 35% test.

LLM - Corporate Tax Instructor: Dwight Drake Problem 302 Basic Facts: G dies; Gross estate 2 mill; 100k estate taxes and burial and administration expenses; Estate includes 200k FMV X Corp stock (total o/s FMV 1.4 mill) and 400k FMV Y Corp stock (total o/s FMV 1.6 mill). G wife A owns 200k X Corp stock, which she held as tenant-in-common with G. Will Y Corp redemption qualify for 303 treatment? requirement is over 35% of gross estate less allowable deductions (here 1.9 mill). 35% is 665k. - Y stock of 400k isn’t enough. X stock in estate can be aggregated if estate owns 20% or more of all classes of stock of both entities. Wife A’s tenant-in- common shares may be included for 20% test, but not 35% test. With Wife A’s shares, 20% test met for both X and Y, so can consider both. - But 35% test still failed because value of X and Y stock in estate only 600k, not 665. Hence, 303 redemption treatment not available.