Question

15. What is the general rule regarding attribution of stock ownership to a redeemed shareholder from an entity in which the shareholder has an interest. Attach Internal Revenue Code Section

Answer 1

The tax treatment of a stock redemption is based on the shareholder's percentage of holding in the corporation. IRC 318 lists out how t determine ownership of the stock.

Attribution from entity: Shares held by an entity are considered to be owned proportionately by the owners of that particular entity. So if, for example, a partnership firm with 3 partners owns 3000 shares of a corporation, those shares are assumed to be owned as 1000 by each equal partner.

Family Attribution: Any stocks held by an individual's spouse, children, or parents are assumed to be held indirectly by the individual.

Attribution by option: Any person holding options to purchase a stock are treated as holding the stock indirectly.

If a stocks redemption decreases the stake of a shareholder significantly, then the redemption is treated as a capital sale, and the gain or loss is treated as a capital gain or loss, similar to the treatment if it was sold in the open market.

IRC 302 states that if the entire interest gets terminated by the redemption, it is to be treated as a sale.

It also states that if a substantially disproportionate redemption occurs, where there is significant reduction in the stake, if:

• the redemption results in a decrease of voting power to less than 50% of the outstanding stock; and
• the shareholder's voting percentage falls to below 80% of his original voting percentage;

then the redemption is treated as a sale.