1. 1 CORPORATE TAXATION I Today Today Finish Problems on Page 233Finish Problems on Page 233 United States v. DavisUnited States v. Davis Revenue Ruling 85-106Revenue Ruling 85-106 Problems on Page 247Problems on Page 247 Revenue Ruling 79-184Revenue Ruling 79-184 Problems on Page 253Problems on Page 253 Problems on Page 255Problems on Page 255

2. 2 Problems on Page 233, Problem 1 Randell Corporation Alison 50 shares John 100 shares Chuck 25 shares

3. 3 Problems on Page 233, Problem 1 (a) Does Allison file the waiver under § 302(c)(2)(A)(iii)? If yes, then yes. (a) Does Allison file the waiver under § 302(c)(2)(A)(iii)? If yes, then yes. (b) No, unless she can establish to the satisfaction of the district director (i) reasonable cause and (ii) such is established within a reasonable time period (b) No, unless she can establish to the satisfaction of the district director (i) reasonable cause and (ii) such is established within a reasonable time period (c) No, the interest retained by Allison is a forbidden interest other than that of a creditor (c) No, the interest retained by Allison is a forbidden interest other than that of a creditor (d) Transaction II clearly is ok provided that Allison files the waiver. Transaction I will depend on whether the redemption was part of a “plan which is firm and fixed and in which the steps are clearly integrated.” (Niedermeyer v. Commissioner, 62 T.C. 280) (d) Transaction II clearly is ok provided that Allison files the waiver. Transaction I will depend on whether the redemption was part of a “plan which is firm and fixed and in which the steps are clearly integrated.” (Niedermeyer v. Commissioner, 62 T.C. 280)

4. 4 Problems on Page 233, Problem 1 (e) No, at least in the 9 th Circuit following Lynch v. Commissioner, this will not work (e) No, at least in the 9 th Circuit following Lynch v. Commissioner, this will not work (f) No, the prohibition on working for the entity extends to its subsidiaries (Reg. § 1.302-4(c)) (f) No, the prohibition on working for the entity extends to its subsidiaries (Reg. § 1.302-4(c)) (g) Yes, the prohibition does not extend to “bequests or inheritance” of stocks (§ 302(c)(2)(A)(ii)) (g) Yes, the prohibition does not extend to “bequests or inheritance” of stocks (§ 302(c)(2)(A)(ii))

5. 5 Problems on Page 233, Problem 2 (a) Probably, but need to look at the 20-year provision and the restrictions (are they those of a creditor or do the exert to much control?) (a) Probably, but need to look at the 20-year provision and the restrictions (are they those of a creditor or do the exert to much control?) (b) Probably not after Lynch. Lynch appears (at least in the 9 th Circuit to be a complete prohibition). (b) Probably not after Lynch. Lynch appears (at least in the 9 th Circuit to be a complete prohibition).

6. 6 Problems on Page 233, Problem 3 Cinelab Corporation Mary 30 shares John 50 shares Estate of Sam 20 shares Beneficiary Bella

7. 7 Problems on Page 233, Problem 3 (a) Provided that BOTH Bella and the Estate file the required waiver, this is ok under § 302(c)(2)(A) (a) Provided that BOTH Bella and the Estate file the required waiver, this is ok under § 302(c)(2)(A) (b) Problematic, since the attribution to John and Mary could not be waived by them § 302(c)(2)(C) (b) Problematic, since the attribution to John and Mary could not be waived by them § 302(c)(2)(C) (c) Same as (b) above (c) Same as (b) above

8. 8 Problems on Page 233, Problem 3 Cinelab Corporation Mary 30 shares John 50 shares Estate of Sam 20 shares Sam Trust Residual Beneficiary Nancy Beneficiary Bella

9. 9 Problems on Page 233, Problem 3 (a) Provided that BOTH Bella and the Estate file the required waiver, this is ok under § 302(c)(2)(A) (a) Provided that BOTH Bella and the Estate file the required waiver, this is ok under § 302(c)(2)(A) (b) Problematic, since the attribution to John and Mary could not be waived by them under § 302(c)(2)(C) (b) Problematic, since the attribution to John and Mary could not be waived by them under § 302(c)(2)(C) (c) Same as (b) above (c) Same as (b) above (d) Ok, if Bella and the trust waive family attribution (Nancy need not as her siblings stock can not be attributed to her – no in and out of the trust) (d) Ok, if Bella and the trust waive family attribution (Nancy need not as her siblings stock can not be attributed to her – no in and out of the trust) (f) SKIP (f) SKIP

10. 10 United States v. Davis Facts: Taxpayer and his wife owned 50% of a corporation (25% each). Taxpayer purchased $25,000 of preferred stock. Subsequently, Taxpayer purchased the 50% owned by the non- family member and divided them between his son and Daughter. Under Section 318 Taxpayer thus owned 100% of the company by attribution. The loan was made to allow the corporation to complete some debt financing that they had previously negotiated. When the 3 rd party debt was paid off, the corporation redeemed the preferred stock. Facts: Taxpayer and his wife owned 50% of a corporation (25% each). Taxpayer purchased $25,000 of preferred stock. Subsequently, Taxpayer purchased the 50% owned by the non- family member and divided them between his son and Daughter. Under Section 318 Taxpayer thus owned 100% of the company by attribution. The loan was made to allow the corporation to complete some debt financing that they had previously negotiated. When the 3 rd party debt was paid off, the corporation redeemed the preferred stock. Issue was the redemption of the preferred stock a distribution under Section 301 or an exchange under 302? Issue was the redemption of the preferred stock a distribution under Section 301 or an exchange under 302? Sub Issue #1: is Section 318 attributable to Section 302(b)(1)?Sub Issue #1: is Section 318 attributable to Section 302(b)(1)? Sub Issue #2: does the presence of a “Business Purpose” protect the distribution from treatment under section 301?Sub Issue #2: does the presence of a “Business Purpose” protect the distribution from treatment under section 301? Sub Issue #3: is what is the definition of “not essentially equivalent to a dividend” under Section 302(b)(1)?Sub Issue #3: is what is the definition of “not essentially equivalent to a dividend” under Section 302(b)(1)?

11. 11 United States v. Davis Outcome: Outcome: Sub Issue #1: To not apply section 318 to section 302(b)(1) would obviate section 302(b)(2), thus this could not have been the intentSub Issue #1: To not apply section 318 to section 302(b)(1) would obviate section 302(b)(2), thus this could not have been the intent Sub Issue #2: The business purpose is not sufficient to protect the distribution from treatment under section 301.Sub Issue #2: The business purpose is not sufficient to protect the distribution from treatment under section 301. Sub Issue #3: The legislature clearly did not mean for “essentially equivalent to a dividend” to mirror the prior standard or the Senate Committee Report would not have referred to the fact the presence of Earnings & Profits of the company is immaterial. Rather, we look at three factors:Sub Issue #3: The legislature clearly did not mean for “essentially equivalent to a dividend” to mirror the prior standard or the Senate Committee Report would not have referred to the fact the presence of Earnings & Profits of the company is immaterial. Rather, we look at three factors: Change in Voting Rights Change in Voting Rights Change in right to participate in E&P of the corp. Change in right to participate in E&P of the corp. Change in rights on liquidation Change in rights on liquidation Main issue: Because there was no change in voting rights (100% ownership before, 100% ownership after) the repayment does not satisfy section 302(b)(1) and therefore is a distribution, not an exchange.Main issue: Because there was no change in voting rights (100% ownership before, 100% ownership after) the repayment does not satisfy section 302(b)(1) and therefore is a distribution, not an exchange.

12. 12 Revenue Ruling 85-106 X Corporation B 19 Common 19 Non-Voting 9.5 Preferred A 19 Common 19 Non-Voting 9.5 Preferred C 18 Common Minority 44 Common 22 NV 11 Preferred Trust 18 N-V 9 Preferred Beneficiary C

13. 13 Revenue Ruling 85-106 Facts: T Trust redeems 6 shares of preferred stock in X (approximately 12% of the preferred stock) Facts: T Trust redeems 6 shares of preferred stock in X (approximately 12% of the preferred stock) C, the beneficiary of T Trust, constructively still owns 18% (both before and after the redemption) of the voting stock (i.e. no section 302(b)(2) or 302(b)(2) qualification) C, the beneficiary of T Trust, constructively still owns 18% (both before and after the redemption) of the voting stock (i.e. no section 302(b)(2) or 302(b)(2) qualification) Issue: Does the redemption qualify as not “essentially equivalent to a dividend” under section 302(b)(1)? Issue: Does the redemption qualify as not “essentially equivalent to a dividend” under section 302(b)(1)?

14. 14 Revenue Ruling 85-106 X Corporation B 19 Common 19 Non-Voting 9.5 Preferred A 19 Common 19 Non-Voting 9.5 Preferred C 18 Common Minority 44 Common 22 NV 11 Preferred T Trust 18 N-V 3 Preferred Beneficiary C

15. 15 Revenue Ruling 85-106 Ruling: Ruling: Factors to look at are the change in the taxpayer’s:Factors to look at are the change in the taxpayer’s: Right to vote Right to vote Right to participate in current earnings Right to participate in current earnings Right to share in net assets on liquidation Right to share in net assets on liquidation The taxpayer’s right to vote did not change, even though his right to participate did The taxpayer’s right to vote did not change, even though his right to participate did The fact that the taxpayer’s ability to continue to “control” the company with others as a “control group” did not change, makes this outside of section 302(b)(1) The fact that the taxpayer’s ability to continue to “control” the company with others as a “control group” did not change, makes this outside of section 302(b)(1)

16. 16 Problems on Page 247, Problem 1 A 28 Shares Z Corporation B 25 Shares C 23 Shares D 24 Shares

17. 17 Problems on Page 247, Problem 1(a) A 28-> 21 Shares Z Corporation B 25 Shares C 23 Shares D 24 Shares 7 Shares Redeemed From A Not “substantially equivalent to a dividend” because A can no longer act in concert with just one other shareholder to establish control (i.e. can not get over 50% with any one other person) whereas before he could with any of B, C or D

18. 18 Problems on Page 247, Problem 1(b) A 28-> 23 Shares Z Corporation B 25 Shares C 23 Shares D 24 Shares 5 Shares Redeemed From A Since A & D are mother and daughter, A is considered to own more than 50% before and less than 50% after. This would not be “substantially equivalent to a dividend”

19. 19 Problems on Page 247, Problem 1(c) A 28->23 Shares Z Corporation B 25 Shares C 23 Shares D 24 Shares 5 Shares Redeemed From A Since A & B are mother and daughter, A is considered to own more than 50% both before and after. This would be “substantially equivalent to a dividend”

20. 20 Problems on Page 247, Problem 1(d) A 28->23 Shares Z Corporation B 25 Shares C 23 Shares D 24 Shares 5 Shares Redeemed From A Since A & B are mother and daughter, A is considered to own 53% before and 51% after (a reduction). Under Cerone v. Commissioner, family discord can be taken into account in the facts and circumstance to determine whether this reduction is meaningful and thus not “substantially equivalent to a dividend”

21. 21 Problems on Page 247, Problem 2 Y Corporation A 40 Common 0 Pref. B 20 Common 55 Pref. C 25 Common 10 Pref. D 15 Common 15 Pref. E 0 Common 20 Pref.

22. 22 Problems on Page 247, Problem 2 Y Corporation 5 Shares Preferred from E Since E only owns Preferred Stock, his lack of change in voting rights is immaterial. He has NO voting rights afterwards. Thus, the reduction in his preferred stock, which affects both of the other two criteria (the right to participate in earnings and the right to share in net assets on liquidation) and is therefore meaningful. A 40 Common 0 Pref. B 20 Common 55 Pref. C 25 Common 10 Pref. D 15 Common 15 Pref. E 0 Common 20->15 Pref.

23. 23 Problems on Page 247, Problem 2 Y Corporation 100 Shares Preferred from A-E Since the shares are not held proportionately, each shareholder must be looked at individually to see whether there is a meaningful reduction in his or her (i) right to vote, (ii) right to participate in earnings, or (iii) right to share in net assets on liquidation. Did A-E’s right to vote change? Under Rev. Rule 85- 106, is this the end of the analysis? A 40 Common 0->0 Pref. B 20 Common 55->0 Pref. C 25 Common 10->0 Pref. D 15 Common 15->0 Pref. E 0 Common 20->0 Pref.