be of relatively small value [and therefore will qualify
as property under §351], within the meaning of
§ 243; Dividends Received
section 1.351-1(a)(1)(ii) of the regulations, if the fair
§358(d) Assumption of Liabilities
(a) In the case of a corporation, there shall be allowed as a
market value of the property transferred is equal to, [FOR BASIS PURPOSES ONLY] Where as part of the
deduction an amount equal to the following percentages of
or in excess of, 10 percent of the fair market value of consideration to the taxpayer, another party to the exchange
the amount received as dividends from a domestic
[e.g. the Corp.] assumed a liability of the taxpayer [e.g. the s/h],
the stock and securities already owned (or to be
corporation…:
such assumption shall…be treated as money received by the
received for services) by such person.
(1) 50 percent, in the case of dividends other than
(2) Solely for Stock: Transfers must be made solely in taxpayer on the exchange. (Middle column, 358(a)(1)(A)(ii))
dividends described in paragraph (2) or (3); …
exchange for stock of the controlled corporation.
Avoiding 357(c) Gain:
(3) 100 percent, in the case of qualifying dividends (as
-Stock means an equity investment.
(1) Contribute Cash; (2) Remain Personally Liable
defined in subsection (b)(1)).
Not included:
(doesn’t work); (3) Contribute a Note
(b) Qualifying dividends
-Stock rights (e.g. stock options); Warrants Peracchi v. Comm’r: (Contributing a Note) “economic
(1) …the term “qualifying dividend” means any dividend
(agree to purchase stock in future)
exposure of the shareholder is the ultimate measuring
received by a corporation—
-Debt securities
rod”; tax court has never agreed w/ this case b/c appears
(A) if at the close of the day on which such
-Nonqualified preferred stock
there is no economic exposure; but if in right jx, then
dividend is received, such corporation is a member Basis to Distributees; Stock Rec’d by S/H (+Boot Rec’d)
cite it/write a promissory note. May argue (but risk
of the same affiliated group (80% owned) as the §358(a)(1) …The basis of the property [e.g. the stock]…
losing in non-Peracchi jx): if nonrecourse debt, no
corporation distributing such dividend, and
received under [§351] without recognition of gain or loss shall
economic exposure; if recourse debt, then economic
UPS v. Comm’r: “a transaction ceases to merit tax respect when be the same as that of the property exchanged [e.g. the
exposure
it has no economic effects other than the creation of tax
contributed property]–
benefits.” “the kind of economic effects requires to entitle a
(A) decreased by –
Corporation Consequences
transaction to respect in taxation include the creation of genuine
(i) the fair market value of other property [boot] §1032: G/L to Corporation on Dist. of Stock
obligations enforceable by an unrelated party.” Business
…[received],
(a)... No gain or loss shall be recognized to a
purpose: bona fide, profit seeking business
(ii) the amount of any money received…, and
corporation on the receipt of money or other property in
“Check the Box”
(B) increased by –
exchange for stock (including treasury stock) of such
Reg. §301-7701-2(b)(1): … a business entity organized under a
(i) the amount which was treated as a dividend,
corporation. …
federal or state statute, or under a statute of a federally
and
§362: Basis to Corporations (Boot)
recognized Indian tribe, if the statute describes or refers to the
(ii) the amount of gain …[recognized on the
(a)… If property was acquired on or after [6/22/1954], by a
entity as incorporated or as a corporation, body corporate or
exchange].
corporation –
body politic….
§1223(1) Holding Period of S/H for Stock Rec’d
(1) in connection with a transaction to which §351 …
Comm’r v. Bollinger: a corp. may act as agent; determine by (1) In determining the holding period for which the taxpayer
applies, or
factors (1) if the corp. is a true agent, its relations w/ its
[the contributing s/h] has held property received [e.g., the
(2) as paid in surplus or as a contribution to capital,
principal must not be dependent upon the fact that it is owned shares of stock] in an exchange, there shall be included in the then the basis shall be the same as it would be in the hands
by the principal; (2) its business purpose must be the carrying period for which he held the property exchanged [the
of the transferor [e.g., the contributing shareholder]…
on of the normal duties of an agent.
contributed property] if, …the property has...the same basis (transfer basis), increased by the amount of gain recognized
in whole or in part in his hands as the property exchanged [see to the transferor on such transfer.
§358(a)] (transfer basis), and…the property exchanged [the §1223(2) Corp’s Holding Period of Property
Shareholder Consequences:
In determining the period for which the taxpayer [e.g., the
§351 Transfer to Corp. Controlled by Transferor; G/L to S/H contributed property] at the time of such exchange was a
corporation] has held property [the contributed property]
capital asset as defined in section 1221 or property
(a) General rule. No gain or loss shall be recognized if
however acquired there shall be included the period for
described in section 1231…
property is transferred to a corporation by one or more
which such property [the contributed property] was held by
persons solely in exchange for stock in such corporation and §1221 Capital Asset Defined
any other person [the contributing shareholder], …
immediately after the exchange such person or persons are in (a)…the term “capital asset” means property held by the
taxpayer (whether or not connected with his trade or business),
control (as defined in section 368(c)) of the corporation.
but does not include –
Revenue Ruling 68-55 (Use this calculate taxes for client)
(3) Control: §368(c) defines “control” as: (i) The
(1) [inventory]…,
(1) each asset transferred must be considered
ownership of at least 80 percent of the total combined
(2) [depreciable property used in a trade or business]…,
separately exchanged
voting power of all classes of stock entitled to vote, and;
(3) [certain intangibles – copyrights etc]…,
(2) the FMV of each category of consideration
(ii) At least 80% of the total number of shares of all other
(4) [accounts receivable]….
received must be separately allocated to the
classes of stock.
transferred assets in proportion to the relative
-The requisite control must be obtained by one or more §1231 Property Used in the Trade or Business…
(b)(1) …The term “property used in a trade or business” means
FMV of the transferred assets
transferors who act together under a single integrated
…, of a character subject to the allowance for depreciation ..., Further Analysis: (see pg. 10-11 outline; bk pgs. 523-26)
plan.
-S/H may have split holding period in stock: Allocate in
1.
There is no limit on the number of held for more than 1 year, and real property used in a trade or
business, held for more than 1 year, which is not [among
proportion to the FMV of the asset in relation to the FMV
transferors.
other things] –
of all the assets combined; see 362(a)
2.
Some may receive voting stock
(A) [inventory]….
-Corp Basis-Nothing explains how to allocate basis
while others receive nonvoting
Property (not stock) Rec’d by S/H; Treatment of Boot
Incorporation of a Going Business
stock.
§351(b) Receipt of Property – If subsection (a) [e.g.,
Hempt Brothers. Inc. v. U.S.: Congressional intent is to
3.
If the corporation issues more than
nonrecognition of gain] would apply…but for the fact that there
give nonrecognition to a transfer of a total business from
one class of voting stock, the
is received, in addition to stock…, other property or money,
a non-corporate to a corporate form
transferor “group” must own at
then –
Rev. Rul. 95-74: about timing of events;
least 80% of each class.
(1) gain… to such recipient shall be recognized, but
-“Assume” liability if expected to satisfy; where
4.
To be part of an integrated plan, the
more than one person agrees to satisfy a liability,
not in excess of –
transfers need not be simultaneous but
(a) the amount of money received, plus
only one of them would be “expected” to satisfy it
the transfers must be executed under a
(b) …[FMV] of such other property received;
Issue 1: are the liabilities assumed by S Corp liabilities
group of mutually interdependent
and
under 357(c)(1) and 358(d)? ANSWER: No, bc at this
steps in the formation.
(2) no loss to such recipient shall be recognized.
point in time, the liabilities had not yet been taken into
Intermountain Lumber: if the transferee has irrevocably
Timing of Section 351(b) Gain
account/have not arisen
foregone or relinquished the legal right to
Typically, § 351(b) requires that any gain be recognized
Issue 2: Once assumed, how will the liabilities be treated
determine whether to keep the shares,
in the § 351 exchange? ANSWER: when remediation
ownership in such shares is lacking (e.g., option K) immediately upon receipt of the boot.
efforts occurred three years after 351 transaction, the
Assumption of Liabilities
-voluntary gift does not break control
§61(a)(12) generally, relief of debt is income to you
liabilities assumed are deductible by transferee (S Corp)
(1) Property: Reg. §1.351-1(a)(1), (2)
§357 Assumption of Liabilities; Effect on Shareholders
Held: contingent liabilities are not assumed
-Includes cash, capital assets, inventory, A/R,
(a) General rule. Except as provided in … (c), if—
liabilities and 357(c) does not result in gain
patents and certain intangibles.
(1) the taxpayer [e.g. the S/H] receives property [e.g.
recognized
-Stock issued for services is not considered to be
stock] which would be permitted to be received under
§ 357(c): Liabilities in Excess of Basis
issued “in return for property.” §351(d)(1);
section 351 … without the recognition of gain …, and (3) Certain liabilities excluded
1.351-1(a)(1)(i)
(2) as part of the consideration, another party [e.g. the (A) In general - If a taxpayer transfers, in an exchange to which
Reg. § 1.351-1(a)(1)(ii): Stock issued for property
corporation] to the exchange assumes a liability of the section 351 applies, a liability the payment of which either—
of relatively small value in comparison to the
taxpayer,
(i) would give rise to a deduction…,
value of the stock already owned (or to be received
for services) shall not be treated as having been then such assumption shall not be treated as money or other then, for purposes of paragraph (1), the amount of such liability
shall be excluded in determining the amount of liabilities
property, and shall not prevent the exchange from being
issued in return for property if the primary
assumed.
within the provisions of section 351 … i.e. don’t rec. gain
purpose of the transfer is to qualify [for
§357(c): Liabilities in Excess of Basis
-so if a contingent liability later materializes, gain would not be
nonrecognition under §351]…
In the case of an exchange--(A) to which section 351 applies, re-calculated as to the S/H
Rev. Proc. 77-37:
Rev. Proc 77-37 provides, generally, that when a person … if the sum of the amount of the liabilities assumed
transfers property to a corporation in exchange for stock exceeds the total of the adjusted basis of the property
Also: Character of gain: allocate the gain according to character
or securities of such corporation and the primary purpose transferred pursuant to such exchange, then such excess
of the transfer is to qualify under section 351 of the Code shall be considered as a gain from the sale or exchange of a
capital asset or …[non capital asset, as the case may be]…
…, the property transferred will not be considered to
Corporation as a Taxable Entity
Formation of a C Corporation
Capital Structure of a C
federal tax refund, discharge of
Two methods for capitalizing a corporation:
indebtedness, etc.
§301(a): Distributions of Property
(1) Equity (Stock)
2.
Certain items deductible in determining taxable
(a) …, a distribution of property (like cash) (as defined in
(i) Common
income must be added back to arrive at E&P.
section 317(a)) made by a corporation to a shareholder …
(ii) Preferred
1.
Dividends received from deduction
shall be treated in the manner provided in subsection (c).
(2) Debt
3.
Certain nondeductible items must be subtracted
§301(c): Amount Taxable (MAIN RULE)
(i) Bonds
from taxable income to arrive at E&P.
(c) [if] subsection (a) applies—(if property, very inclusive)
(ii) Notes
1.
§ 267 stock w/ built in loss;
(1) Amount constituting dividend. That portion of the
(3) What about hybrids (e.g., convertible? Securities?)
meals/entertainment limited to 50%,
distribution which is a dividend (as defined in section
TCJA § 163(j) Limit on Deducting Business Interest
other 50% allowed as subtracting
316) shall be included in gross income.
§163(j), as modified by the Tax Cuts & Jobs Act (2017),
from E&P
Currently taxed at cap gains rate rather than
generally limits the deduction for business interest expense to
4.
Certain timing adjustments (increase or decrease)
ordinary rate, but this fluctuates; commonly
the sum of:
to arrive at E&P
changed tax code in presidential election cycle
1.
Above line deductions not allowed for

(Business interest income) + (30% of Adjusted
where change of party power.
Taxable Income) + (Floor Plan Financing Interest)
E&P ( added to E&P)
(2) Amount applied against basis. That portion of the
o
Adjusted Taxable Income (ATI) is
2.
Below line subtracted from
distribution which is not a dividend shall be applied
defined as EBITDA (Earnings Before
deductions subtracted from E&P
against and reduce the adjusted basis of the stock.
Interest, Taxes, Depreciation, &
Distributions of Cash
(not taxable)
Amortization) deductions.
Rev. Rul. 74-164: bk pg. 602 calculation (not discussed
(3) Amount in excess of basis.
o
After 2021 ATI defined as EBIT only.
extensively, not totally fair to test)
(A) In general. …, that portion of the distribution
Cares Act: New § 163(j) Limit on Deducting Business Interest
Distributions of Property
which is not a dividend, to the extent that it exceeds
Under New Code § 163(j)(10):
General Utilities & Oper. Corp. v. Helvering
the adjusted basis of the stock, shall be treated as gain
§311 Tax Consequences of Corporate Distribution

The ATI component of the formula increases to 50
from the sale or exchange of property... (meaning tax as
•
(a) … no gain or loss shall be recognized to a
percent (instead of 30 percent) for taxable years
capital gain)
corporation on the distribution …, of
beginning in 2019 and 2020.
§316.
Dividend
Defined
…
“dividend”
means
any
•
(1) its stock …, or
•
Taxpayers are permitted to elect to substitute their
distribution
of
property
made
by
corporation
to
its
•
(2) property.
2019 “adjusted taxable income” for 2020 “adjusted
shareholders
–
Comm’r v. Court Holding, 324 U.S. 331 (1945)
taxable income” when determining the § 163(j)
(1)
out
of
its
earnings
and
profits
accumulated
after
U.S. v. Cumberland Public Service Co.,338 U.S.
limitation for 2020.
February 28, 1913, [accumulated] or
451 (1950)
Note that, in many instances because of the pandemic and
(2)
[current]
out
of
its
earnings
and
profits
of
the
taxable
§311 Taxability of Corporation on Distribution (after 1986)
recession in 2020, AGI may be more in 2019 thereby providing
year
(computed
as
of
the
close
of
the
taxable
year
(a) … Except as provided in (b), no gain or loss shall be
for a higher deduction limitation and therefore a greater
without diminution by reason of any distributions made recognized to a corporation on the distribution …, of
deduction.
during
the
taxable
year),
without
regard
to
the
amount
of
(1) its stock …, or
Debt versus Equity
earnings and profits at the time the distribution was
(2) property.
What is intended by taxpayers to be treated as debt can be
made.
(b) Distributions of appreciated property –
recast by the IRS into equity. The results of recasting debt into
.
.
.
every
distribution
is
made
of
earnings
and
profits
to
the
(1) …If
equity are devastating.
extent thereof, and from the most recently accumulated
(A) a corporation distributes property … to a

Payments of interest and corpus on the purported
earnings and profits… [e.g. its LIFO – last in first out; current,
shareholder…, and
debt from the corporation to the shareholders may
then accumulated]
(B) the [FMV] of such property exceeds its
become nondeductible dividends.
Summary §243 (Dividends Received Deduction)
basis…
o
Shareholders must amend their
Applies when two corporations, one owns stock of another;
then gain shall be recognized to the distributing corporation
individual returns to include dividend
does not apply when individual owns stock
as if such property were sold to the distributee at its [FMV].
income and remove interest income.

If shareholder corporation owns 80% or more of -But then FMV when distributed is the new BASIS.
o
Corporation must amend corporate
the
vote
and
value
of
the
stock,
then
100%
DRD.
Consequences to Corporation
returns to remove deductions which

If a shareholder corporation owns less than 80% § 311(b): Distribution of Appreciated Property
results in additional tax, interest and
but
20%
or
more
of
the
vote
and
value
of
the
stock,
1.
Gain recognized by corporation
penalties due.
then 65% DRD.
•
Gain = FMV – Basis
•
Determination of whether a particular instrument

If
a
shareholder
corporation
owns
less
than
20%
of
2.
Recognition of gain increases E&P by amount
represents debt or equity can under certain
the stock, then 50% DRD.
of gain
circumstances be challenging under existing law.
Earnings & Profits
3.
E&P then decreased by FMV of property. See §
§385 Treatment … as Equity or Indebtedness
312(b)(2) and § 312(a)(3).
(b) Factors. The regulations … shall set forth factors which are §312 Effect on E&P
•
Note that ordinarily E&P would be
to be taken into account in determining … whether a debtor- Section 312, Effect on earnings and profits provides generally
that:
reduced by the basis of the asset
creditor relationship exists or a corporation-shareholder
(a) …on a distribution of property…, the earnings and
distributed.
relationship exists. The factors so set forth in the regulations
profits of the corporation shall be decreased by the sum
•
But in this case, gain is recognized,
may include among other factors: (including intent of parties)
of –
tax is paid, E&P is increased by
(1) whether there is a (i) written unconditional promise to
(1) money
amount of gain, basis in asset is
pay on demand or on a specified date (ii) a sum certain in
(2) principal amount of obligations, and
stepped up to FMV and E&P is
money in return for an adequate consideration in money or
(3) the adjusted basis of other property, so
reduced by the FMV on distribution
money's worth, and (iii) to pay a fixed rate of interest,
distributed.
of the asset
-(just promissory note) if these terms, then it looks more
(c) Adjustments for liabilities. – [provides that] …proper Consequences to Shareholders
like debt.
adjustment shall be made for –
•
The amount of the distribution is the fair
(2) whether there is subordination to or preference over any
the amount of any liability to which the property
market value of the distributed property,
indebtedness of the corporation,
distributed is subjected.
reduced by any liabilities assumed by the
-if S/H gives loan to Corp. and loan is subordinated, then
shareholder. §301(b)
less likely that S/H will collect, and so looks more like [Thus, the decrease in earnings and profits upon a distribution
of property will be offset/increased by the amount of liabilities
•
The shareholder’s basis in the distributed
equity financing than a loan (debt)
that the property is subjected to.]
property is its fair market value as of the date
(3) the ratio of debt to equity of the corporation, (Super
§312(f): Effect of Contribs/Distribs on E&P
of distribution. §301(d).
factor)
-related to thinly capitalized: The less equity that corp. (f) Effect on earnings and profits of gain or loss and of receipt
has, the less likely S/H will be able to collect on the loan, of tax-free sales…
(1) [Generally, provides that gain or loss realized from
and thus it looks more like equity than a debt
the sale or other disposition of property …shall increase
-the higher the ratio, the less likely a S/H loan thereafter
or decrease earnings and profits to, but not beyond, the
would be like debt, but would rather be equity
extent to which such realized gain or loss was recognized
-Argue to use FMV rather than Basis as denominator
in computing taxable income…]
-Outside debt: >10:1 is excessive, then equity
-Subsection (f)(1), although a bit long winded,
-Inside debt: >3:1 is excessive, then equity
really stands for the proposition that capital gains
(4) whether there is convertibility into the stock of the
realized but not recognized for tax purposes are
corporation, and
not added back in computing earnings and
-if so, more like equity than debt
profits.
(5) the relationship between holdings of stock in the
-For example, 351 transfers, like kind exchanges,
corporation and holdings of the interest in question. (Super
involuntary conversions 1033, etc.
factor)
-Has to do with proportional debt, e.g. 1/3, 1/3, 1/3 S/H; E&P Calculation; Start with taxable income:
1.
Certain items excluded from taxable income are
why is proportionate debt likely to be equity? Bc each
added back to arrive at E&P
has an equal interest in the company; if debt is held in
1.
E.g. municipal bonds (interest
roughly the same proportion as stock, the “creditors”
income), proceeds of life insurance,
(S/Hs) have no economic incentive to act like creditors
by setting or enforcing the terms of the so-called liability.
Nonliquidating Distributions
•
All the stock owned by a 50% or more shareholder is
shareholder level shall be the fair market value of the
attributed to the corporation
property at the time of the distribution.
•
But none of the stock owned by a <50% shareholder will §336 - Gain or loss recognized on property distributed in
complete liquidation (Property)
be attributed
Redemption (a/k/a a partial liquidation)
(a) General rule – Except as otherwise provided, gain or loss
§318(a)(4) Option Attribution

Ordinarily, an acquisition by a corporation of its
shall be recognized to a liquidating corporation on the
•
A person holding an option to acquire stock is
stock from a shareholder in exchange for cash,
considered as owning that stock.
distribution of property in complete liquidation as if such
debt or other property. §317(b).
•
Note that where option attribution and family attribution property were sold to the distributee at FMV.

Generally, the reacquired stock is:
(b) Liabilities – . . . if distributed property in a liquidation is
both apply, option attribution applies over family
o
Cancelled, or
attribution. (don’t double count)
subject to a liability. . . The FMV of the property is treated
o
Held as treasury stock
as not less than the liability. [liability included in FMV]
Additional Operating Rules
Comparison of Sale vs. Dividend Scenarios
Distributions to Related Parties
•
Reattribution (is required)
•
Shareholder Sale of Stock
§267(a)(1) …No deduction shall be allowed in respect of any
•
No Double Family Attribution
•
$250 of LTCG ($750 AR - $500
loss from the sale or exchange of property…between
•
No “Sideways” Attribution
Basis)
persons specified in any of the paragraphs of subsection (b)
•
S corporation Treated as a Partnership
•
Results in $50 tax (20% of $250)
[see (b)(2)].
Redemptions Tested at the Shareholder Level
•
Redemption (Treated as a Dividend)
BUT The preceding sentence shall not apply to any loss of
See 302 first column, then
•
$500 taxed as a dividend
the distributing corporation in the case of a complete
If the requirements of §302(b)(1)-(4) are not met, the
•
Results in $100 tax (20% of $500)
distribution in relation to the transaction will be treated as liquidation. [Corp. may deduct..?]
Thus, where there is substantial earnings and profits, the
a distribution under §301 (a dividend to the extent of E&P). §336(d) Exception [Re-implicates § 267]
redemption treated as a dividend can (depending on the
(1) – No loss recognized in certain distributions to related
§302(b)(2) Substantially Disproportionate Redemptions
circumstances), be more expensive than the sale of stock by the
persons
•
Subsection (a) shall apply [and therefore sale
shareholder.
(A)…No loss shall be recognized to a liquidating
exchange treatment is accorded] if the distribution
Issue: How can shareholders treat redemptions as a sale or
corporation on the distribution of any property to a
is “substantially disproportionate” as to the
exchange under the Code?
related person (within the meaning of section 267) ifshareholder.
•
Answer: Change of ownership
(i) such distribution is non pro rata, or
•
A distribution is “substantially
Sections 302 & 317(b)
(ii) such distribution is disqualified property
disproportionate” if it meets three
§ 302 Distribution in Redemption of Stock
§267(b)(2) Definition of Related Party
requirements: (only 1 and 2 on exam)
(a) Generally provides that if (1) a corporation redeems its
An individual and a corporation more than 50 percent in
§302(b)(2)(B): First requirement
stock (w/n meaning of §317(b)), and if (2) (b)(1), (2), (3) or
•
Limitation: Immediately after the redemption, value of the outstanding stock of which is owned, directly or
(4) applies, such redemption shall be treated as a sale or
the shareholder must own less than 50% [also indirectly, by or for such individual…
exchange. (thereby giving better tax outcome to company w/ a
Thus, a 50% or greater shareholder is considered
considering family attribution!!!] of the total
lot of E&P)
“related” to the corporation such that no deduction is
combined voting power of all classes of stock
-(b)(1) Redemptions not equivalent to a dividend
allowed under the general rule.
entitled to vote.
-(b)(2) Substantially disproportionate redemption of
§336(d)(1)(B): Disqualified Property
§302(b)(2)(C): Second requirement
stock (then see 302(b)(2))
For purposes of … (A), the term “disqualified property”
•
The percentage of voting stock owned by the
-(b)(3)Termination of shareholder’s interest;
shareholder immediately after the redemption must means any property which is acquired (1) by the liquidating
(and S/H signs document w/ IRS saying they will
be less than 80% of the percentage of total voting corporation in a transaction to which section 351 applied, or
no longer manage company; but how often do
(2) as a contribution to capital, during the 5 year period
stock owned by the shareholder immediately
parents really give up management/control in
ending on the date of distribution.
before the redemption, AND [3]
closely held businesses?)  not safest option; 2 is §302(b)(2)(C): Second requirement Expressed as a Formula
Losses- Tax Avoidance Purpose
or
§336(d)(2) – Prevents the transfer of pre-contribution built-in-(b)(4)Redemption from noncorporate shareholder in
losses on distributions to [ANY – E.G., UNRELATED]
partial liquidation
shareholders by reducing the basis of distributed property by
Note: 1 and 4 bad; most lawyers like #2
the excess of:
Tax Consequences to Shareholder
(i) the adjusted basis upon acquisition; over
•
Noncorporate Shareholders
(ii) the FMV of the property upon contribution.
•
Generally prefer a redemption to be
treated as a sale or exchange subject
to capital gain and/or return of basis.
•
Corporate Shareholders
•
May prefer dividend treatment if the
distribution qualifies for the §243
dividends received deduction.
§302(b)(2): Third requirement
Constructive Ownership of Stock
•
The shareholder’s percentage ownership of
•
The determination under §302(b) is primarily
common stock (whether voting or nonvoting)
based upon measuring the change in a
after the redemption also must be less than 80% of
shareholder’s proportionate interest in a
the percentage of common stock owned before the
corporation.
redemption. §302(b)(2)(C).
•
Generally, a meaningful transfer of
•
If there is more than one class of
ownership results in sale or exchange
common stock, the 80% percent test is
treatment (capital gain).
applied by reference to fair market
§318 provides the rules relating to constructive ownership of
value.
stock.
Rev. Rul. 85-14
•
In determining stock ownership for §302 purposes, A plan in place does not have to be formal; redemption of
an individual or entity is treated as owning stock S/H’s shares was causally related to redemption of B’s shares in
owned by certain:
that A saw an apparent opportunity to secure exchange
•
Related family members,
treatment under section 302(b)(2).
•
Corporations,
•
Partners & Partnerships
Reg. §1.332-2(c) provides that a corporation is liquidated:
•
Estates & Trusts
•
when the corporation ceases to be a going concern and its
§318(a)(1) Family Attribution
activities are merely for the purpose of winding up its
An individual is treated as owning stock owned by his/her
affairs, paying off its debts, and distributing any
spouse, children (incl. legally adopted persons),
remaining balance to its shareholders.
grandchildren, parents.
§331(a) – Distributions in liquidation; G/L to S/H (money)
•
But, not his/her siblings, grandparents or inlaws
•
Provides that amounts received by a shareholder in
•
§318(a)(5)(B) (no double attribution)
complete liquidation are treated as full payment in
•
Stock constructively owned by one family
exchange for the shareholder’s stock.
member may not again be attributed to
•
Thus, shareholders who hold their stock as a capital
another family member.
asset will recognize capital gain or loss in an amount
§318(a)(2)(A) Entity to Partner/Beneficiary Attribution
equal to the difference between:
•
Stock owned by … a partnership or estate is considered
•
The cash and FMV of property received and
as proportionately owned by the partners or beneficiaries
•
The shareholder’s adjusted basis in the
with present interests.
stock.
§318(a)(3)(A) Partner/Beneficiary to Entity Attribution

Stock owned by partners or beneficiaries of an estate is §334 – Basis of Property Received in Liquidation (Shareholder)
GR: The shareholder’s basis in property distributed by a
considered as owned by the partnership or estate.
corporation in a complete liquidation that is taxable at the
§318(a)(3)(C) Shareholder to Corporation Attribution
Redemptions and Partial
Liquidations
Complete Liquidations