Redemptions (Portfolio 767)
At a glance
I. Introduction
II. History
III. Definition of a Redemption
IV. Tax Consequences of a Redemption
V. Section 302(b)(3) - Complete Termination of Shareholder's Interest
VI. Section 302(b)(2) - Substantially Disproportionate Redemptions
VII. Section 302(b)(1) - Not Essentially Equivalent to a Dividend
VIII. Partial Liquidation: § 302(b)(4) and § 302(e)
IX. Constructive Stock Ownership: § 318
X. Bootstrap Acquisitions and Related Topics
XI. Other Special Issues
Abstract
Bloomberg Tax Portfolio, Redemptions, No. 767, discusses the tax effects of a stock redemption both to the redeeming corporation and the redeemed shareholder and analyzes the categories of §302. In addition to discussing the applicable rules and tax consequences, this Portfolio emphasizes practical problems and planning techniques.
A redemption is a transfer by a shareholder of some or all of his stock to the issuing corporation in return for cash or other property. Section 302 contains the basic tax rules governing redemptions of stock by shareholders.
Section 302 authorizes “exchange” treatment to a recipient of a redemption distribution if: (1) its effect is not essentially equivalent to a dividend; (2) the exchange is “substantially disproportionate;” (3) the shareholder's interest in the corporation is completely terminated; or (4) it is a distribution in redemption of the stock of a noncorporate shareholder in a partial liquidation. If a redemption fails to satisfy any of these tests, the distribution is treated as a §301 distribution.
Section 311 addresses the effect on the issuing corporation of a distribution of property (other than cash or obligations of the issuing corporation), while §312 addresses the effect on the issuing corporation's earnings and profits.
In addition to analyzing the definitional elements and the effects of redemptions, this Portfolio briefly explains the application of the constructive ownership rules of §318 to redemptions.