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FEDERAL INCOME, ESTATE & GIFT TAX PROJECT 1 (STOCK REDEMPTIONS)

handle is hein.ali/aliftp0401 and id is 1 raw text is: Stock Redemptions I. This portion of the memorandum considers the question whether there are any redemptions of stock meriting capital gain treatment which do not satisfy the 50% test of §30Z(b)(2)(B) and which cannot be taken care of by the escape clause of §302(b)(1). Section 302 of the Internal Revenue Code of 1954 provides that certain redemptions by a corporation of its stock will not be treated as dividends. One type of redemption which will not be treated as a dividend is a redemption which is substantially disproportionate. §302(b)(Z). To be substantially disproportionate the percentages of the total voting stock and of the total common stock of the company which the shareholder owns after a redemption of some of his stock must be less than 80% of the percentages which he owned prior to the redemption. The 50% test of §302(b)(Z)(B) is a limitation on this general rule of disproportionality. It provides that even though a redemption is otherwise substantially disproportionate it shall nonetheless not be so considered unless the shareholder owns less than 50% of the total combined voting power of all classes of stock entitled to vote after the redemption. To meet the 50% test a majority shareholder must therefore relinquish voting control or a redemption of his stock will not be considered substantially disproportionate. There is, however, in §302(b)(1) an escape clause which provides that redemptions will not receive dividend treatment if the redemption is not essentially equivalent to a dividend. Hence redemptions not meeting the 50% test may nonetheless be exempt from dividend treatment under this escape clause,

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