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a.

All gain to s/h is capital, even though a portion of proceeds may reflect E&P attributable to redeemed shares

b.

E&P is reduced proportionate to portion of shares redeemed (i.e., redemption of 20% of outstanding shares reduces E&P by 20%, even though s/h recognizes no dividend income).

B.

Treatment only applies to qualified redemptions as defined in Sec. 302:

a.

Redemptions not “essentially equivalent to dividends”

b.

Substantially disproportionate redemptions:

i.

At least 20% reduction in s/h’s direct and indirect interest in corporation

ii.

S/h owns, directly and indirectly, less than 50% of outstanding shares following transaction

c.

Partial liquidations (distributions attributable to disposition of a qualified line of business of corporation)

d.

Complete liquidation of s/h’s interest

e.

Sec. 303—redemptions to pay estate taxes

8

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