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interest. Whether the remaining shareholder ex-spouse has a
dividend would depend on whether he or she is considered as
having the primary and unconditional obligation to purchase the
departing shareholder’s stock that was satisfied by the redemp-
tion.
If the remaining shareholder is considered to have had his
primary and unconditional obligation to purchase the stock
satisfied by the redemption, then under general principles of tax
law the redemption should be recast as a purchase of the stock by
the remaining shareholder, followed by his contribution of the
stock to the corporation in exchange for the cash that he con-
structively received and used to purchase the stock. This recast
transaction results in a distribution of cash essentially equiva-
lent to a dividend to him under sections 301 and 302(b)(1), and
the departing shareholder ex-spouse should be entitled to
nonrecognition of gain under section 1041.
(3) In Judge Colvin’s view, the “on behalf of” standard of
Q&A-9 trumps traditional redemption tax law. I don’t favor this
view because it results in almost all cases under current law in
a greater total tax liability to the private parties. Its
adoption would mean that less will be available to pay off the
departing shareholder ex-spouse.7 However, Judge Colvin’s view
provides clear and consistent treatment of the ex-spouses and is
7 See supra note 2.
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