ARTICLE: Stock Redemptions in the Marital Corporation: What Happens When the Love is Gone? Skip over navigation
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Copyright (c) 2002 Rutgers University, The State University of New Jersey
Rutgers Law Review

ARTICLE: Stock Redemptions in the Marital Corporation: What Happens When the Love is Gone?

Winter, 2002

Rutgers Law Review

54 Rutgers L. Rev. 487


Cheyanna L. Jaffke*


Lucy and Ricky, a married couple, own all 300 shares of Tropicana Corporation, which operates a nightclub. The Tropicana Corporation (Corp.) is valued at $ 300,000. The only other asset the couple owns is the family home valued at $ 100,000. Lucy (L) and Ricky (R) agree to divorce and divide their property as follows: L will take the family home and 100 shares of Corp. and R will take the remaining 200 shares of Corp. Later, L & R decide that it is in the best interest of Corp. that they do not continue to co-own the business. They amend their divorce agreement so that R will buy L's 100 shares for $ 100,000 or at his election, Corp. will redeem the shares for $ 100,000.

R elects for Corp. to redeem L's shares. L transfers her shares to Corp. in exchange for promissory note, which R personally guarantees. Who is taxed on this transaction? Lucy? Ricky? Both? No one? The answer depends upon how the courts will elect to interpret the transaction. This uncertainty about who is taxed arises when the courts have tried to apply section 1041 1 of the Internal Revenue Code to this otherwise business transaction. Section 1041 defers the recognition of gain for transactions that occur between spouses or ex-spouses. The regulations for section 1041 permit deferral of recognition of a gain for transactions on behalf of a spouse or ex-spouse.

L and R's transaction is a corporate redemption. Absent a ...
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