- 10 -
holder’s basis in his stock. (Some of the Hursts’ proceeds from
their sales of their stock benefited from these rules, but that
was not a point of contention in the case.)
For much of the Code’s history (including 1997), noncorpor-
ate sellers usually preferred a redemption to be treated as a
sale because that offered the advantage of taxation at capital
gains rates and the possible recognition of that gain over many
years under section 453’s provisions for installment sales. This
preference led to increasingly elaborate rules for determining
which redemptions qualify as sales and which are treated as divi-
dends or other section 301 distributions. The Code has three
safe harbors: redemptions that are substantially disproportion-
ate with respect to the shareholder, sec. 302(b)(2); redemptions
that terminate a shareholder’s interest, sec. 302(b)(3); and
redemptions of a noncorporate shareholder’s stock in a corpora-
tion that is partially liquidating, sec. 302(b)(4). Each of
these safe harbors comes with its own regulations and case law.
The Code also allows redemption treatment if a taxpayer can
meet the vaguer standard of proving that a particular redemption
is “not essentially equivalent to a dividend.” Sec. 302(b)(1).
The relevant regulation notes that success under this standard
turns “upon the facts and circumstances of each case.” Sec.
1.302-2(b), Income Tax Regs.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011