Richard E. and Mary Ann Hurst - Page 11

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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