Corporations’ Redemptions and Reorganizations

Under §317(b), a stock redemption occurs when:

A corporation acquires stock from a shareholder in exchange for cash or property

A redemption can be treated as:

Either Sale/Exchange or Dividend treatment (depending on circumstances)

Which of the following is a reason corporations redeem stock?

• Increase shareholder value

• Acquire stock of a deceased shareholder

• Maintain ownership structure

When a shareholder receives property in a redemption, their basis in the property is:

The fair market value (FMV) on the redemption date

Why do individuals prefer Sale/Exchange treatment?

It allows recovery of stock basis and the ability to offset capital gains with capital losses

What is the main advantage for corporations when a redemption is treated as a dividend?

Dividends Received Deduction

Corporations pay taxes on dividends and capital gains at the same rate as:

Ordinary income

Under §267, when a >50% shareholder has a redemption loss, the loss is:

Disallowed

Stock attribution rules are used to determine:

Related party ownership in redemptions

Which family members are considered under attribution rules?

• Parents and children

• Spouses

• Grandparents and grandchildren

If a shareholder owns stock in a corporation that owns stock in another corporation, this is:

Entity attribution

Which of the following is a type of qualifying redemption?

• Not essentially equivalent redemption

• Disproportionate redemption

• Complete termination redemption

A redemption is “not essentially equivalent to a dividend” if:

It meaningfully reduces the shareholder’s ownership interest

A disproportionate redemption qualifies if after the redemption, the shareholder:

Owns less than 80% of the prior interest and less than 50% of voting power

If a redemption fails disproportionate redemption tests, it may still qualify as:

Not essentially equivalent redemption

A complete termination redemption qualifies if the shareholder:

Has no ownership after redemption and files a 10-year waiver with the IRS

A partial liquidation qualifies if:

It is not essentially equivalent to a dividend and is pursuant to a plan made in the plan year or the following year

A redemption to pay death taxes (§303) provides S/E treatment if:

It represents a substantial part (~35%) of the estate and covers death/funeral/admin costs

A tax-free reorganization is similar to:

§351 exchange

A requirement for a tax-free reorganization is:

• Plan of reorganization

• Continuity of interest

• Sound business purpose

In a reorganization, the acquirer is:

The purchasing company

In a reorganization, the target is:

The company being acquired

For the acquiring corporation, gain is recognized if:

It transfers other property (boot)

The basis of property received by the acquirer is:

Same as target’s basis plus any recognized gain

For the target corporation, gain may be recognized if:

It retains/distributes property other than stock or securities (boot)

For shareholders, gain is recognized if:

They receive cash or property (boot) in addition to stock

The gain recognized by shareholders is limited to:

Boot received or realized gain, whichever is smaller

Shareholder basis in stock received equals:

Basis of surrendered stock, minus boot received, plus gain/dividend recognized

Type A reorganization is:

Statutory merger or consolidation

Type B reorganization requires acquirer to own at least:

80%

Type C reorganization requires asset transfer of:

90% net asset value and 70% gross asset value

In a Spin-Off (Type D):

Shareholder composition remains the same

In a Split-Off (Type D):

Composition does not remain the same

In a Split-Up (Type D):

Old corporation liquidates, new corporations receive assets

Type E reorganization involves:

Recapitalization

Type F reorganization involves:

Change in identity, form, or place of organization

Type G reorganization requires debtor to be:

Insolvent

Tax attributes carry over in:

Type A, Type C, acquisitive Type D, and Type G

Target keeps its attributes in:

Type B, Type E, Type F, and divisive Type D

Under §382, when >50% ownership change occurs, NOL deduction is limited to:

FMV of loss corporation × federal long-term tax-exempt rate