1. LLM Corporate Tax Instructor: Dwight Drake Z Corp Problem 249 -1(a) (a) Z redeems 7 of A’s shares. Prior to redemption, A could control with any other single shareholder. After, A owns 21 of 93 shares and could no longer control with just one. Good case for (b)(1). Rev. Rule 76-364 (OK under similar facts.) D 28 Shrs CBA 25 Shrs23 Shrs24 Shrs Redeem 7 Shrs

2. LLM Corporate Tax Instructor: Dwight Drake Z Corp Problem 249 -1(b) (b) Z redeems 5 shares from A; A and D are mother – daughter. Before with attribution, A owned 52% (52 / 100). After, A own 49.4% (47 / 95). This loss of control probably enough to get under (b)(1) where balance of stock owned only be a few (no big dispersion). Rev. Rule 95-502. D 28 Shrs CBA 25 Shrs23 Shrs24 Shrs Redeem 5 Shrs Mother / Daughter

3. LLM Corporate Tax Instructor: Dwight Drake Z Corp Problem 249 -1(c), (d) (c)Z redeems 5 shares from A; A and B mother – daughter. 53% before (53 / 100) and 50.5% after (48 / 90), with attribution. No hope under (b)(1). (d) Same as (c), but A and B not spoken since B married outside of faith. Issue: Does hostile family situation negate family attribution of 318? IRS has said “no.” Rev. Rule 80-26. First Circuit once allowed, but most have held no. Even if attribution negated, still have (b)(1) issue. Before redemption, A had 29 shares and could control with any one of other three. After redemption of 5 shares, could control only with B, who she doesn’t talk to. Should family hostility be issue for (b)(1) purposes? Tax Court in Cerone v. Comm, 87 T.C. 1 (1986) said “yes”. D 28 Shrs CBA 25 Shrs23 Shrs24 Shrs Redeem 5 Shrs Mother / Daughter

4. LLM Corporate Tax Instructor: Dwight Drake Y Corp Problem 249 -2(a), (b) (a) Y redeems 5 preferred shared from E. (b)(1) qualified because E never had any control. Reg. 1.302-2(a); Rev. Rule 77-426. (b) Y redeems all preferred stock. Each shareholder analyzed. E qualifies under (b)(3) – complete redemption. Others technically all fail because no change in voting control; thus no hope under (b)(2) or (b)(1). But is this right as to B, who has taken big hit in economic interest – from 37.5% of all shares to 10%? DCBA 0 Com, 20 Pref. Redeem 5 Pref E 15 Com, 15 Pref. 25 Com, 10 Pref. 20 Com, 55 Pref. 40 Com, 0 Pref.

5. Problem 249- 3 Basic Facts: A owns 10 shares common, basis 15k. - What is basis impact if 5 shares are redeemed in transaction treated as dividend? Basis of remaining 5 shares is 15k. Reg 1.302-2(c). - What basis impact if all 10 shares redeemed in transaction treated as dividend? Would happen where (b)(3) not available because family attribution waiver not available. Here, basis is transferred to shares belonging to others that were attributed to A and killed (b)(3). Reg. 1.302-2(c), Ex 2.

6. 302(b)(4) – Partial Liquidation Exception Applies: - Only to noncorporate shareholders - Even thought distribution pro rata and otherwise flunks (b)(1) – (b)(3). - Based on impact at corporate level – not shareholder level. - Stock held by partnership, estate or trust deemed help proportional by partners and beneficiaries. Requirements: 302(e) - Not essentially equivalent to dividend (determined at corporate level) - Distribution pursuant to a plan - Distribution occurs in taxable year plan adopted or following year.

7. Partial Liquidation – Not Essentially Equivalent to Dividend Safe Harbor: - Distribution attributable to ceasing to conduct “qualified trade or business” – operated for 5 years and not acquired during 5 yr period in transaction that recognized gain or loss. - After distribution, corp still involved in active conduct of “qualified trade or business.” Non- Safe Harbor Scenarios - Tough – must show serious contraction of business. - Example: Fire destruction; corporate cutback and all insurance proceeds distributed. - Bona fide business reason unrelated to desire to bail out liquid assets - No hope if plan is to bail out accumulated investment assets

8. LLM Corporate Tax Instructor: Dwight Drake A Corp Books & Cram Problem 253-(a) (a) A distributes Books (more than 5 yrs owned, as is Cram) to shareholders in equal shares and redeems 50 shares from each. - For M &P, qualifies for exchange as partial liquidation if pursuant to “plan”, done within year of plan or next year. A Corp must continue to operate Cram. Both held 5 yrs. Same result if no actual share surrender (just reallocate basis to stock). Makes no difference if pro rata under (b)(4) partial liquidation provision. - Partial liquidation provision not available to corp shareholder. So I Corp stuck with dividend under 301 (pro rata kills any hope of other three 302(b) provisions). 243 dividend deduction of 70% available, but any redemption that is part of partial liquidation requires stock basis reduction under 1059. MP I Corp Beta 1/3 Com 100% 1/3 Com Books distributed / Redeem 50 Shrs from each

9. LLM Corporate Tax Instructor: Dwight Drake A Corp Books & Cram Problem 253-(b) (b) What impact if Books bought 3 yrs ago for cash? Not qualified business because not held 5 years. All shareholders have 301 dividend. Concern is bailing liquid cash through partial liquidation. Hence, 5 yr rule. If bought in tax-free reorg, would have used stock and could qualify if business ran for 5 yrs. No liquid asset bailout. MP I Corp Beta 1/3 Com 100% 1/3 Com Books distributed / Redeem 50 Shrs from each

10. LLM Corporate Tax Instructor: Dwight Drake A Corp Books & Cram Problem 253-(c) (c) Books destroyed by fire, 1/2 insurance proceeds distributed pro rata and other half used to scale down book business. I Corp still dividend. For P & M, not qualify under 302(e)(2) because not ceasing business or distributing all assets. Could be “not essentially equivalent to dividend” under (e)(1) but need more facts to see if it corporate contraction. For ruling purposes, IRS requires 20% cut in revenues, FMV and employees. Rev. Proc. 2002-3. MP I Corp Beta 1/3 Com 100% 1/3 Com Books destroyed / Half proceeds used in prorata redemption

11. LLM Corporate Tax Instructor: Dwight Drake A Corp Books & Cram Problem 253-(d) (d) Books distributed to Michael in redemption of all his stock. Valid partial liquidation - exchange treatment allowed. Also may qualify under (b)(3) (family attribution waived) and maybe (b)(1) (attribution interest reduced from 67% to 50%). MP I Corp Beta 1/3 Com 100% 1/3 Com Books distributed to M for all stock

12. LLM Corporate Tax Instructor: Dwight Drake A Corp Books & Cram Problem 253-(e) (e) Books distributed to I Corp in redemption of all stock. Although can’t qualify under partial liquidation provision, qualifies under (b)(3) as termination of complete interest. Exchange treatment allowed. MP I Corp Beta 1/3 Com 100% 1/3 Com Books distributed to I Corp for all stock

13. LLM Corporate Tax Instructor: Dwight Drake A Corp Books & Cram Problem 253-(f), (g), (h) (f) Securities portfolio distributed pro rata in redemption. No hope. Not partial liquidation or corporate contraction. 301 dividend to all shareholders. (g) A sells stock in B Corp and distributes proceeds pro rata. Sub corp stock can’t qualify as partial liquidation per Rev. Rule 79-184. Hence, 301 dividend to all shareholders. (h) A liquidates B Corp (operated for more than 5 yrs) and distributes assets in pro rata redemption. If liquidated in non-taxable transaction under 332 (discussed later in course), A picks up all B Corp attributes and may qualify as partial liquidation per Rev. Rule 75-223. MP I Corp Beta 1/3 Com 100% 1/3 Com

14. Redemption Impact on Corp Three issues: - Gain or loss to corp on distribution of property other than cash. 311 governs the same as it does for non-liquidating distributions. Gain is always recognized by corporation, but losses not recognized. - E&P impact. E&P reduced by amount of distribution, but per 312(n)(7) reduction can not exceed ratable share of E&P attributable to redeemed stock. So if 1/3 stock redeemed, E&P before redemption can not be reduced more than 1/3. - Stock acquisition expenses paid by corp (brokerage commissions, legal fees, etc) are not deductible per Section 162(k). They are treated as non- amortizable capital expenditures. Amounts paid that have no nexus to redemption (employment agreement amount) are deductible and loan costs and fees involved in redemption may be amortized over term of loan.

15. LLM Corporate Tax Instructor: Dwight Drake X Corp Problem 260 A shares redeemed for 250k cash. Since cash, X recognizes no gain or loss on exchange. Since half of shares redeemed, 312(n)(7) permits half reduction in E&P. Thus, E&P reduced 100k and remaining E&P 100k. AB 100 Com 100k Basis 250k for all A’s stock 100 Com 100k Basis 100k Acc. E&P 100k Cur. E&P

16. Zenz Bootstrap Acquisitions Three scenarios all part of common plan: Scenario 1: Shareholder sells some stock and then has corporation redeem balance of shares. Qualifies under 302(b)(3) even though corporate E & P distributed to help facilitate acquisition. Zenz case/ Scenario 2: Corporation sells new shares to new shareholder and then redeem shares from existing shareholder. Percentages before and after both transactions control whether (b)(2) “substantially disproportionate” tests met. Scenario 3: Existing shareholder sell some shares to new shareholder and then have corporation redeem shares from existing shareholder. Percentages before and after both transactions control whether (b)(2) “substantially disproportionate” tests met. Rev. Rule 75-447

17. LLM Corporate Tax Instructor: Dwight Drake T Corp Problem 265 Can qualify for exchange treatment as complete (b)(3) redemption under Zenz case so long as all part of the same plan. Do we care if capital gains and dividend rates the same? If S’s stock basis over 400k, (b)(3) treatment will result is less income. With dividend scenario, have 100k dividend and capital loss E&P implications? If exchange, T Corp E&P reduced 20%, but not over 100k amount distributed in redemption. If 301 dividend, E&P reduced 100k. Thus, if E&P less than 500k before, may get bigger E&P reduction (a good thing) with dividend. SB 100% Com 100k for 20% of S’s stock Sale 80% for 400k

18. Corporate Buy-Sell Agreements -Most important document in many privately-owned businesses -Determines value and exit opportunities for shareholders -Contain buy-out triggers: death, disability, bankruptcy, expulsion, etc. -Many tax issues, including estate tax valuation. -Often rely on (b)(3) exception for family businesses -Constructive dividend trap - Co-shareholders become obligated under agreement to buy out a departing shareholder. Cross-purchase structure. - Corporation then discharges obligation of co-shareholders by redeeming stock. - Result is constructive dividend to co-sharholders. - Often screwed-up through bad life insurance structuring.

19. Corporate Buy-Sell C Corp Shareholder A Shareholder B Cross-Purchase Buy-Sell Agreement Sells Stock Cash or Property Constructive dividend

20. Problem 271 Basic Facts: A, B & C unrelated equal shareholders of Y Corp with cross purchase buy-sell. Y Corp owns polices on each shareholder. B dies, Y Corp collects policy and pays proceeds to redeem B stock. -Premium payments by Y Corp not deductible per 264(a)(1). -Premium payments by Y not dividend to any shareholders because Y Corp own policy. -Insurance proceeds received by Y Corp tax free per 101(a). Likely AMT tax trigger. -Y Corp E&P increased by excess of insurance proceeds over aggregate premiums paid on policy. -On payment of insurance proceeds in redemption of B stock, A & C have constructive dividend distribution because their obligation to buy shares being satisfied by Y Corp. Defective buy-sell planning. 301 dividend to extent of E&P.

21. Insurance Cross-Purchase C Corp 15 Million Shareholder A 3 mill policy on B Shareholder B 12 mill policy on A 80% 20% Cross-Purchase Agreement

22. Insurance Cross-Purschase A dies - B sells business for 15 million A family return: Payment from B 12 million Estate Taxes 5 million Net return 7 million B’s Return Sales Proceeds 15 million Income Tax.6 million Net return 14.4 million A Goes Ballistic!

23. Restructured Insurance Program C Corp 15 Million Shareholder A 3 mill policy on B Shareholder B 80% 20% One Leg Cross-Purchase Agreement Life Ins. Trust 12 mill policy

24. Restructured Insurance Program A dies - B sells business for 15 million A family return: Payment on sale 12 million Estate Taxes 5 million Net return on sale 7 million Tax Free Insurance 12 million Total yield 19 million B’s Return Sales Proceeds 3 million Income Tax.6 million Net return 2.4 million