CORPORATE TAXATION I

CORPORATE TAXATION I • Today • Revenue Ruling 69-630 • Limitations on § 311(b) • Introduction to Redemptions • Constructive Ownership of Stock • Problems on Page 213 • Substantially Disproportionate Redemptions & § 302(b)(2) • Revenue Ruling 85-14 • Problems on Page 217 • Waiver of Family Attribution – Lynch v. Commissioner • Revenue Ruling 59-119 • Revenue Ruling 77-293 • Problems on Page 233

Revenue Ruling 69-630 • A owns 100% of corporations X & Y • A has X sell assets to Y at a below market rate • Deemed to be a distribution to A of the assets invoking the § 311(b) rules of gain to X and a Dividend to A • A is then deemed to have made a contribution to capital in Y of the same assets

Limitations • Dividends received Deduction Testing Period for Common Stock • Dividends received Deduction Testing Period for Preferred Stock • If the corporate shareholder does not own the stock for the requisite period, then it does not get the dividends received deduction 45-days Pre-Ex-dividend Ex-dividend Date Dividend 45-day Post-Ex-dividend Test Period 90-days Pre-Ex-dividend Ex-dividend Date Dividend 90-day Post-Ex-dividend Test Period

Limitations on § 311(b) • Extraordinary Dividends under § 1059 • For corporate shareholders only

Introduction to Redemptions • Historical preference for exchange treatment • Preferred rates (ordinary v. LTCG) • Recovery of basis • Offset for capital losses • Installment reporting under § 453 • Landscape has changed with the taxation of “qualified dividends” at LTCG rates

Section 302 • § 302 was created to provide certainty as to whether a redemption would be treated as an Exchange • § 302 attempted to codify when a redemption was not “substantially equivalent to a dividend” • I.e. where the shareholder’s interest was so reduced such that the redemption could not possibly be consider a dividend • In order to test for a change in ownership, it becomes necessary to take into account ownership by related parties – i.e. to attribute stock to related individuals

Section 318 • Attribution Types: • Family Attribution • Entity to Beneficiary • Beneficiary to Entity • Option Attribution

Family Attribution Parents Shareholder Spouse Children Grandchildren

Entity to Beneficiary Partnership In proportion to Partnership or Estate Interest Shareholder Estate In proportion to the ownership of the corporation if the Shareholder owns 50% of the value of the Corporation’s stock Corporation

Beneficiary to Entity Partner All stock owned by any Partner or Beneficiary Partnership, Estate, or Corporation Beneficiary of Estate All stock owned by any 50% shareholder Shareholder

Option Rules • Any stock to which a person holds an option is considered owned by the holder

Chain Attribution • Option Attribution takes precedence over family attribution where both apply • No “double” family attribution • No “sideways” partner-to-partnership-to-other partner attribution

Problem 1 on Page 213 Grandmother’s Estate Grandfather (25) (15) (15) 50% - 50% Mother (20) + (5) Cousin Daughter (15) Son – adopted (10) – (5)

Problem 1 on Page 213 Grandmother’s Estate Grandfather (25) (15) (15) 50% - 50% Mother (20) Cousin Daughter (15) Son – adopted (10) Grandfather

Problem 1 on Page 213 Grandmother’s Estate Grandfather (25) (15) (15) 50% - 50% Mother (20) + (5) Cousin Daughter (15) Son – adopted (10) – (5) Mother’s Daughter

Problem 2 on Page 213 W (100 Y) A (25%) B (25%) C (25%) D (25%) (25 X) (25 X) (25 X) (25 X) Yancy A, B, C, D Partnership Xerxes

Problem 2(a) on Page 213 W A (25%) B (25%) C (25%) D (25%) (25) (25) (25) (25) Yancy A, B, C, D Partnership Ends with A because no partner-to-partner attribution Xerxes

Problem 2(a) on Page 213 M W A (25%) B (25%) C (25%) D (25%) (25) (25) (25) (25) Yancy A, B, C, D Partnership No double family Attribution Xerxes

Problem 2(b) on Page 213 W A (25%) B (25%) C (25%) D (25%) (25) (25) (25) (25) Yancy A, B, C, D Partnership Ends with A because no partner-to-partner attribution Xerxes

Problem 2(b) on Page 213(10% Alternative) W A (25%) B (25%) C (25%) D (25%) (25) (25) (25) (25) Yancy A, B, C, D Partnership Ends with Yancy because no attribution to a 10% shareholder Xerxes

Problem 2(c) on Page 213(Partnership Alternative) W (100) A B C D A, B, C, D Partnership Yancy Partnership is attributed anything that a partner owns or is attributed Xerxes

Problem 2(c) on Page 213(Partners Alternative – Same for C & D) W (100) A B C D A, B, C, D Partnership Yancy No “in and out” Attribution Xerxes

Problem 2(c) on Page 213(Xerxes Alternative) W (100) A B C D Yancy A, B, C, D Partnership Extends all the way to W’s ownership – one can attribute from a partner into an entity and down to a subsidiary entity but not back up to another partner (i.e. A=>B is prohibited, but A=>X is not) Xerxes

Substantially Disproportionate Redemptions & § 302(b)(2) • Following the distribution, the shareholder must • own less than 50% of the total combined voting power of all the classes of stock entitled to vote • own less than 80% of the voting stock that he or she owned prior to the redemption • own less than 80% of the stock that he or she owned prior to the redemption based on fair market value

Revenue Ruling 85-14 • Facts: • Corporation had a buy-sell agreement that forced the corporation to repurchase stock of shareholders who leave the employment of the corporation • One shareholder announced his intent to leave • Prior to leaving the largest shareholder had the corporation redeem a block of his shares such that he temporarily went below the 50% and 80% thresholds • Upon repurchase of the leaving shareholder’s shares, the larger shareholder’s interest went back above 50% • Ruling: Plan need not be a plan agreed to by others, but merely a design to achieve an outcome prohibited by § 302(b)(2)

CORPORATE TAXATION I