LESSON 6
STOCK REDEMPTIONS and PARTIAL LIQUIDATIONS
6 A General
Note: The 2003 legislation reducing the top rate on dividends to the same rate as capital gains (15 percent) has greatly reduced the importance of the § 302 qualification (the principal remaining advantage now is the ability to offset basis in computing gain or loss).
(1) A has $200 in amount realized and $100 in capital gain realized and recognized. IRC § 1001; Regs. § 1.61-6(a) (which requires A to spread the $600 basis, $10 per share). If A has 10 shares with $20 basis per share, A will be well advised to select these shares to sell, yielding no gain under Regs. §§ 1.1012-1(c)(1) through 1.1012-1(c)(5). B&E ¶¶ 9.21, 12.44[3][c]. Note that in contrast to the following questions involving redemptions, as a seller of stock to B, A clearly uses stock basis to prevent income recognition, A clearly benefits from any capital gains preference (currently 15 percent) that the tax law may provide, and A in unconcerned with X’s E&P.
The pattern of the Schneider case could apply, however, to convert A’s sale to B into a constructive redemption by X, if X really were obligated to provide the 10 shares to B and in effect paid the $200 to A.
Discuss other patterns that are treated as redemptions but do not appear to be in form: Rogers, Casco, and Rev. Rul. 78-250; but cf. Rev. Rul. 73-427, where source of payment to cashed-out minority was the acquirer rather than the corporation, and minority had a sale to the acquirer, not a redemption. B&E ¶¶ 9.01[3], 9.01[6].