Question

Be familiar with the stock attribution rules for redemptions and when they apply.

Answer 1

It is a distribution from the company to its shareholders is commonly referred to as a "section 301 distribution" .

The shareholder must realize a capital gain or loss equivalent to the redemption sum minus the adjusted base of the yielded shares.

If the redemption payment is treated as a distribution, then Subchapter S distribution rules apply:

1. The family attribution rule: an individual indirectly owns any stock owned by the taxpayer's spouse, children, grandchildren, and parents.
2. The attribution-from-an-entity rule: any shares of stock owned by a partnership, limited liability company (LLC), or an S corporation are considered owned proportionately by the owners of the entity. This attribution-from-an-entity rule also applies to a shareholder who owns more than 50% of a C corporation. So if a partnership owns 1000 shares of a corporation, a partner who owns 20% of the partnership is deemed to indirectly own 200 shares of the corporation.
3. The attribution-to-an-entity rule attributes indirect ownership of a corporation by a business entity to the partners, members, or shareholders of the business entity, or, if the business entity is a C corporation, to any shareholder with a majority interest. So if ABC Corporation owns 25% of DEF corporate stock, and you own 51% of ABC Corporation, then you are considered to own indirectly 25% of DEF stock.
4. Any person who owns an option to acquire the stock is also considered to indirectly own the stock.