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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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