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Stock Redemption


Alan Prigal

Chapter Summary


This chapter of Rabkin & Johnson, Federal Tax Guidebook provides expert tax guidance on the tax consequences of a stockholder's surrender of some or all of his or her stock (redemption) by canceling or retiring the stock or holding the stock as treasury stock. It outlines the narrow difference between treatment of redemptions as dividends or the more preferred treatment as capital gain, discussing that a redemption that is sufficiently disproportionate, that is, after redemption the shareholder has a substantially smaller share of the outstanding stock, or terminates the stockholder's interest, is given capital treatment.

In addition, the chapter discusses that tax consequences turn on whether the redemption was equivalent to a dividend distribution. It also discusses special provisions for granting capital treatment when a decedent's stock is redeemed that comprises a substantial part of the decedent's estate. It then considers the special rules that apply where the stock of one controlled corporation is sold by a stockholder to another controlled corporation or where one controlled corporation sells to another the latter's stock.

The chapter discusses partial liquidations that are classified as a sale or exchange are entitled to capital gain (or loss) treatment if partial liquidation results in a fundamental change to the corporation either by termination of the business or business contraction. It examines the lack of tax consequences for a corporation that either receives its own stock in a redemption or sells its own stock in the absence of appreciated property.

Finally the chapter discusses constructive ownership of stock issues when for purposes of a stock redemption a person may be considered as the owner of stock actually owned by another. The chapter also discusses constructive ownership of stock rules in cases of stock held by an estate and/or its beneficiaries as well as option holders.

Rabkin & Johnson, Federal Tax Guidebook (Matthew Bender) summarizes and explains the basic rules of federal income, estate and gift tax, including tax procedure. It clarifies the tax implications of day-to-day business transactions handled by law firms (e.g., incorporating a business, drafting a lease, writing will, etc.). It examines income and deductions; business transactions; corporate distributions; securities and intangibles; real and tangible property; estates, gifts, and trusts; insurance; and procedure.


taxation of stock redemptions as dividends or capital gain,disproportionate reduction in shareholders' ownership interest after redemption,partial liquidation of stockholders' interest,constructive ownership of stock for redemption purposes


For related discussion of tax treatment of corporate distribution under the Internal Revenue Code, see Ch. 21, Dividend; Ch. 22, Source of Disribution; Ch. 23, Liquidation.

For expert guidance on related tax topics, see Vol. 1, Income and Deductions: Vol. 2, Business Transactions,; Vol. 4, Securities and Intangibles; Vol. 5, Real and Tangible Property; Vol. 6, Estates, Gifts and Trusts; and Vol. 7, Insurance


See Tax Planning For Corporations and Shareholders (Matthew Bender), Ch. 7, Problems and Procedures in Shifting Shareholder Control Through Stock Purchases and Redemptions

See Federal Tax Practice and Procedure (Matthew Bender) for expert guidance on resolving disputes with the IRS, plus hypothetical examples in which the authors explain how to perform difficult tax calculations and how to apply tax rules and principles in everyday practice.

See Tax Accounting (Matthew Bender) for comprehensive analysis of the accounting methods and periods available for tax purposes with in-depth explanation of their tax advantages and disadvantages.
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