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Given the stakes involved, the Hursts and their advisers
tried to steer this deal toward the comparatively well-lit safe
harbor of section 302(b)(3)--the “termination redemption.”
Reaching their destination depended on redeeming the HMI stock in
a way that met the rules defining complete termination of owner-
ship. And one might think that a termination redemption would be
easy to spot, because whether a taxpayer did or didn’t sell all
his stock looks like a simple question to answer. Congress,
however, was concerned that taxpayers would manipulate the rules
to get the tax benefits of a sale without actually cutting their
connection to the management of the redeeming corporation. The
problem seemed especially acute in the case of family-owned
businesses, because such businesses often don’t have strict lines
between the roles of owner, employee, consultant, and director.
The Code addresses this problem by incorporating rules
attributing stock ownership of one person to another (set out in
section 318) in the analysis of transactions governed by section
302. Section 318(a)(1)(A)(ii), which treats stock owned by a
child as owned by his parents, became a particular obstacle to
the Hursts’ navigation of these rules because their son Todd was
to be one of HMI’s new owners. This meant that the note that Mr.
Hurst received from HMI in exchange for 90 percent of his HMI
stock might be treated as a section 301 distribution, because he
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Last modified: May 25, 2011