Internal Revenue Service
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 Rev. Rul. 75-2

1975-1 C.B. 99

Sec. 302

IRS Headnote

Redemption; family corporation; executor of estate becoming president of corporation. The requirements of section 302(c)(2)(A)(ii) of the Code are violated where one of two brothers who, within 10 years of the date all of his stock in a family corporation was redeemed and after the required agreement was filed, became president of the corporation while executor of the estate of his sole-shareholder father; Rev. Rul. 72-380 amplified.

Full Text

Rev. Rul. 75-2

Advice has been requested whether the requirements of section 302(c)(2)(A)(ii) of the Internal Revenue Code of 1954 have been violated under the circumstances described below.

In Rev. Rul. 72-380, 1972-2 C.B. 201, two brothers, A and B, and their father, C, owned all of the stock of corporation X. In 1966 X redeemed all of the stock owned by A and B. Under the attribution rules of section 318(a)(1) of the Code, A and B were each considered to own all of the stock of X owned by C. In order not to have the attribution rules of section 318(a)(1) apply to the redemptions so that the redemptions would qualify as complete terminations of interest under section 302(b)(3) and, therefore, would be treated as exchanges under section 302(a) rather than as distributions under section 301, A and B each filed the agreement required by section 302(c)(2)(A)(iii) that they would notify the Internal Revenue Service of any interest (within the meaning of section 302(c)(2)(A)(ii)) acquired by them within 10 years from the date of the redemption. C died in 1970. In his will, A and B were named as executors of his estate. A and B were subsequently qualified as executors of C's estate in a state that allows executors to vote stock contained in the assets of an estate. C's estate consisted, in large part, of stock of X. A was also a beneficiary of C's estate. Rev. Rul. 72-380 holds that, by qualifying as executors of C's estate, A and B did not acquire an interest in X within the meaning of section 302(c)(2)(A)(ii).

A question now arises as to the Federal income tax consequences upon the following additional facts. During the administration of the father's estate, A became the president of X. After the settlement of the estate in 1972, which included a distribution of all of the X stock to A, A remained as president of X.

The question presented under these additional facts is whether the requirements of section 302(c)(2)(A)(ii) of the Code have been violated because A became president of X.

Section 302(c)(2)(A)(ii) of the Code provides, as one of the requirements to waive the family attribution rules of section 318(a)(1) in order for a redemption to qualify as a complete termination of interest under section 302(b)(3), that the shareholder whose stock is redeemed not acquire any interest (including an interest as officer, director, or employee) other then an interest as creditor within 10 years from the date of the redemption except by bequest or inheritance.

Section 302(c)(2)(A)(ii) of the Code further provides that the acquisition of stock by bequest or inheritance does not constitute the acquisition of an interest within the meaning of that section. Technically, a former shareholder who becomes an executor of an estate does not acquire that status by bequest or inheritance, but, since section 302(c)(2)(A)(ii) expressly provides for the reacquisition of a complete direct stock interest by a former shareholder by reason of the death of another shareholder, it is reasonable to conclude that the acquisition under identical circumstances of the significantly lesser interest embodied in the limited and sharply circumscribed right of an executor to vote stock in an estate does not violate section 302(c)(2)(A)(ii). This reasoning formed the basis for the holding in  Rev. Rul. 72-380.

However, section 302(c)(2)(A)(ii) of the Code specifically prohibits a former shareholder from becoming an officer, director, or employee of the redeeming corporation within ten years from the date of the redemption. Therefore, A, by becoming the president of X during the administration of his father's estate and within the ten-year period, violated the requirements of section 302(c)(2)(A)(ii). If A had first become the president of X after the settlement of the estate and within the ten-year period the requirements of section 302(c)(2)(A)(ii) would, likewise, be violated. Furthermore, the requirements of section 302(c)(2)(A)(ii) would be violated even if A discontinued serving as president after the estate was settled.

Accordingly, the attribution rules contained in section 318(a)(1) of the Code will apply to the prior redemption by A. Under these rules, A is considered to own all of the stock of X subsequent to the redemption. Therefore, the redemption in 1966 does not qualify as a complete termination of interest within the meaning of section 302(b)(3) and the distribution to A is treated, pursuant to section 302(d), as a distribution of property to which section 301 applies and is taxable in 1966 as a dividend to the extent of the earnings and profits of X at that time.

Rev. Rul. 72-380 is amplified.