Stock Redemptions: The Standards for Qualifying as a Purchase Under Section 302(b)
29 Pages Posted: 10 May 2007
In an attempt to withdraw funds from a closely held corporation without incurring dividend treatment, the controlling shareholders could cause the corporation to redeem some shares of their stock. Each shareholder would then seek to report as gain only the difference between the amount he received from the corporation and his basis in the shares surrendered. Because there is no substantive difference between a redemption made pro rata among the shareholders and a section 301 distribution, the tax consequences should be the same.
What if the distributions in redemption are somewhat disproportionate? How disproportionate must they be to qualify as a purchase? This article discusses the requirements of section 302(b) for characterizing a stock redemption as a purchase rather than as a dividend equivalent. Particular attention is paid to the determination of the standards to be applied in resolving whether a redemption is "not essentially equivalent to a dividend" so that section 302(b)(1) is applicable.
Keywords: Redemption, taxation, stock, 302(b)
JEL Classification: H20, H25
Suggested Citation: Suggested Citation