LLM - Corporate Tax Instructor: Dwight Drake C Corp Redemption Redemption: C corp buys stock from shareholder. Big Question: Is transaction treated as exchange or as a dividend governed by Section 301 rule? If exchange – - Shareholder has no gain to extent of stock basis. - Excess subject to capital gain treatment. If dividend under 301 – - All ordinary dividend income to extent of E&P; then basis recovery; then sale treatment. - Note: with dividend rate now equal to capital gain rate (15% gift from Bush), only substantive difference is priority on recovery of basis vis-à-vis E&P.

LLM - Corporate Tax Instructor: Dwight Drake Four Options Under 302(b) (b)(1) - Not essentially equivalent to a dividend (b)(2) - Substantially disproportionate (b)(3) - Complete termination of shareholders interest (b)(4) - Partial liquidation

LLM - Corporate Tax Instructor: Dwight Drake 318 Attribution Rules Family Attribution - Parents, spouse, children, grandchildren. No sibling, in-law or grandparent attribution. Entity from attribution - Proportional attribution to owner or beneficiary for stock owned by partnership, estate or trust. Corporate proportionate attribution (based on FMV of stock) to shareholder who owns, directly or via attribution, 50% or more of stock value. Entity to attribution - Stock owned by partners or beneficiaries attributed to partnership, estate or trust. Attribution to corp only for stock held by 50% or more shareholder. Option attribution - All stock subject to option deemed owned by the holder of option. Chain attribution – generally Ok (child to parent to corp), but no double family attribution (child to parent to grandparent).

LLM - Corporate Tax Instructor: Dwight Drake 302(b)(2) – Substantially Disproportionate Three mechanical requirements: 1. After redemption, shareholder owns less than 50% of total combined voting power. 2. After redemption, percent of voting stock less than 80% of percentage of voting before redemption. 3. After redemption, percent of all common (voting and non-voting) less than 80% of percentage before redemption. Note: - Full attribution rules apply. - Multiple transactions part of common plan are aggregated. Rev. Rule

LLM - Corporate Tax Instructor: Dwight Drake 302(b)(3) – Complete Termination Requirement: Shareholder is finished – takes a permanent hike. Only remaining interest can be creditor – nothing else. The Big Break: No family attribution. Makes it possible to transition corp stock to next generation. Special rules: - 10 year forward rule: Selling shareholder not acquire any stock for 10 years, except by bequest or inheritance year back rule: Last 10 years, selling shareholder acquired stock from 318 relative or 318 relative acquired stock from selling shareholder. Not apply if tax avoidance not principal purpose.

LLM Corporate Tax Instructor: Dwight Drake Wham Corp. Problem GF GF constructive ownership: 25 personal + 20 mother direct + 25 from grandchildren + 15 from estate via mother = 85. Daughter constructive ownership: 15 personal + 20 mother direct + 5 mother via option + 15 estate via mother = 55. GM Estate constructive ownership: 30 direct + 70 mother (including 20 mother, 25 GF and 25 kids) = Shares Mom Daughter Adopted Son GM Estate 20 Shares25 Shares15 Shares 30 Shares 5 Share option 50% Cousin 50%

LLM Corporate Tax Instructor: Dwight Drake Partnership. Problem (a) (a) A ownership of X Corp: 25 shares via partnership. W ownership of X Corp: 25 shares via A spouse and partnership. W’s mother: 0 because no in-law attribution. D X Corp Y Corp 100% Shares 25 % 100% CBA 25 % W Married

LLM Corporate Tax Instructor: Dwight Drake Partnership. Problem (b)(c) (b) Y corp ownership of X Corp: 25 shares via A to W and W to Y corp (50% or more shareholder). If W owned 10% of Y, no attribution to Y because 50% or more test not satisfied. (c) Y shares owned by Partnership: All 100 via W to A to Partnership. B,C & D partners: No Y shares. No sideways attribution – from partner to partnership to other partners. X Corp ownership of Y: All 100 shares via partnership ownership. D X Corp Y Corp 100% Shares 25 % 100% CBA 25 % W Married

LLM Corporate Tax Instructor: Dwight Drake Y Corp. Problem 217-1(a) Cathy (a) 1/15 – T redeems 75 of A’s preferred shares. No hope under 302(b)(2) because only nonvoting redeemed. Reg (a). 20 Common, 100 NV Preferred Alice 80 Common, 100 NV Preferred Redeem 75 Preferred

LLM Corporate Tax Instructor: Dwight Drake Y Corp. Problem 217-1(b) Cathy (b) Y also redeems 60 of A’s common shares. No hope under (b)(2) because A owns 50% of voting common after redemption – 20 out of 40 shares. Must own less than 50% voting per 302(b)(2)(B). 20 Common, 100 NV Preferred Alice 80 Common, 100 NV Preferred Redeem 75 Preferred, 60 Common

LLM Corporate Tax Instructor: Dwight Drake Y Corp. Problem 217-1(c) Cathy (c) Y redeems 70 of A’s common shares. 302(b)(2) satisfied. Less than 50% voting after (33%); percentage voting and common after (33%) less than 80% of percentage voting and common before (80%). Preferred stock redemption gets “piggybacked” and qualifies under 302(b)(2) per Reg (a). 20 Common, 100 NV Preferred Alice 80 Common, 100 NV Preferred Redeem 75 Preferred, 70 Common

LLM Corporate Tax Instructor: Dwight Drake Y Corp. Problem 217-1(d) Cathy d) On 12/1, 10 shares of C’s common stock redeemed. Issue is whether they are linked. If not, A’s redemption qualifies under (b)(2) per above. If they are linked, A owns 50% of common after (10 of 20) and thus would not qualify. Note, the 80% “substantially disproportionate” tests are satisfied, not the 50% test. Is 302(b)(2)(D) applicable where only issue is 50% test? Technically “No”. Standard step-transaction principles would be applied. Big question: Were events linked and planned together? 20 Common, 100 NV Preferred Alice 80 Common, 100 NV Preferred Redeem 75 Preferred, 70 Common On 1/15 On 12/1 Redeem 10 Common

LLM Corporate Tax Instructor: Dwight Drake Z Corp. Problem Jerry Issue is 302(b)(2). - D voting interest goes from 60% to 42.8% - thus overall 50% voting test and voting 80% test satisfied. - D total percentage common before was 53.3% (160/300) and is 48.1% after. Flunk overall 80% test. Thus, not qualify under 302(b)(2). - Note: Likely would qualify under 302(b)(1) by virtue of loss of control. 40 V Common, 100 NV Common Don 60 V Common, 100 NV Common Redeems 30 voting common

LLM Corporate Tax Instructor: Dwight Drake R Corp. Problem 235-1(a),(b),(c) J Father (a) R redeems A’s 50 shares. Qualifies under 302(b)(3) with waiver of family attribution under 302(c)(2). Must timely file agreement per 302(c)(2)(A)(iii). (b) Same, but A fails to file agreement. Per Reg (a)(2), A will get reasonable extension if (1) reasonable cause for not filing, and (2) request filed within reasonable time. Statute of limitations extended one year after notification. (c) Same, but price paid to A dependant on R’s profits. No 302(b)(3) because no waiver of family attribution. Profits interest is forbidden interest – more than just a creditor. Reg (d). Amount or certainty can’t be contingent on profits. 100 Common A Daughter 50 Common Redeems 50 Common C Gran Son 25 Common

LLM Corporate Tax Instructor: Dwight Drake R Corp. Problem 235-1(d) thru (f) J Father (d) R redeems 20 A’s shares year 1, 30 shares year 2. Year 2 redemption qualifies under (b)(3). Year 1 qualifies only if it part of “firm and fixed” plan to redeem all. Need not be in writing or binding to be “firm and fixed”. (e) Same, but A remains director. No hope under (b)(3) because no waiver of family attribution. A holds interest more than a creditor. 302(c)(2)(A)(i). Even as inactive director, probably cooked in 9 th circuit. (f) Same, but two years later R forms sub that employs A. No hope under (b)(3). Can have no interest for ten years and this extends to activity of subsidiary. Reg (c). 100 Common A Daughter 50 Common Redeems 50 Common C Gran Son 25 Common

LLM Corporate Tax Instructor: Dwight Drake R Corp. Problem 235-1(g) J Father (g) Same, but C dies in two years and leaves stock to A. 302(b)(3) and waiver of family attribution still good per parenthetical exception in 302(c)(2)(A)(ii). 100 Common A Daughter 50 Common Redeems 50 Common C Gran Son 25 Common

LLM Corporate Tax Instructor: Dwight Drake B&B Corp. Problem 235-2(a) (a) Will redemption qualify under 302(b)(3)? - 20 year note term outside IRS ruling standard (15 year). Some courts have allowed as long as 20 yrs, but risky. Better to keep at 15 yrs. Creditor covenants and security permitted. Rev. Rule Continued rental and option permitted if not dependant on profits and terms are arms-length terms. Rev. Rule Child 30 share gift not violate 302(c)(2)(B)(ii) unless principal purpose tax avoidance. Since Son worked for company and is targeted successor, should have no problem here. Rev. Rule Betty & Bill 150 common + building lease Redeems 120 for 20 year note Junior Son Gift 30 Common

LLM Corporate Tax Instructor: Dwight Drake B&B Corp. Problem 235-2(b) (b) Same, but Betty establishes consulting firm after leaving and firm is hired by B&B Corp. Per Lynch case and Rev. Rule , consulting deal would kill 302(b)(3). Some limited authority to contrary where accounting services provided as independent contractor. Very risky. Dead in 9 th cir. Betty & Bill 150 common + building lease Redeems 120 for 20 year note Junior Son Gift 30 Common

LLM Corporate Tax Instructor: Dwight Drake C Corp. Problem 235-3(a),(b) J Son (a)C redeems 20 shares owned by Estate. 302(b)(3) works if both Estate and B satisfy waiver of family attribution requirements and sign required agreement. 302(c)(2)(C). (b)Same, but B residuary beneficiary of Estate and J and M each receive specific legacies. No hope for waiver of family attribution for estate per 302(c)(2)(C) if redemption with estate. Best to distribute legacies to J and M, then redeem from Estate. 50 Common Father Estate 20 Common Redeems 20 Common M Daughter 30 Common B Mom

LLM Corporate Tax Instructor: Dwight Drake C Corp. Problem 235-3(c),(d),(e). J Son (c) Same, but J and M are residuary beneficiaries of Estate. No hope under 302(b)(3), as J and M’s stock attributed to Estate. (d)20 shares left to QTIP, income to B for life, then to third child N. C redeems shares. 302(b)(3) permitted if B and trust join waiver agreement. Note, K as sibling not deemed “related” under 318(a)(1). (e)Same as (d), but N acquires stock of C three years after redemption. Violates 10 year look-back rule of 302(c)(2)(A(ii) because N’s stock attributed to trust under 318(a)(3)(A). Only family attribution waived under 302(c)(2), not entity attribution. 50 Common Father Estate 20 Common Redeems 20 Common M Daughter 30 Common B Mom