Rev. Rul. 80-26
1980-1 C.B. 66, 1980-4 I.R.B. 7.
Internal Revenue Service
Revenue Ruling
REDEMPTION OF STOCK; CONSTRUCTIVE OWNERSHIP; FAMILY HOSTILITY
Published: January 28, 1980
Section 302.--Distributions in Redemption of Stock, 26 CFR 1.302-1: General.
(Also Sections 301, 318, 7805; 1.301-1, 1.318-1, 301.7805-1.)
Redemption of stock; constructive ownership; family hostility. A corporation, all of the stock of which was owned by three individuals and five trusts, redeemed the stock held by four trusts that were for the benefit of an individual shareholder's children. Before the redemption, each trust owned, actually and constructively, 31 percent of the corporation's stock, and afterwards, each owned 33 percent solely by attribution under section 318 of the Code. Although family hostility prevented the trusts from exercising actual control over such stock, section 318 applies, and the redemption is not a distribution in exchange for stock under section 302(a). The Service will not follow the Robin Haft Trust decision.
ISSUE
Are the rules of attribution under section 318 of the Internal Revenue Code applicable under the facts described below in determining whether a distribution in redemption of stock qualifies under section 302(a) of the Code?
FACTS
X corporation had outstanding one class of voting common stock. The stock was owned by 8 shareholders: A; B (A's brother); C (A's brother-in-law); T A, a trust for the benefit of A, B, and D (A's sister); T1, T2, T3, and T4, 4 separate trusts for the benefit of A's children created by a parent of A's spouse. A's interest in the shares of T A was one-third. B, C, and D are individuals unrelated to the other shareholders within the meaning of section 318 of the Code. As a result of a bitter divorce and acrimonious property settlement between A and A's spouse, all the stock owned by T1, T2, T3, and T4 was redeemed by X. Due to the family hostility these 4 trusts were prevented from exercising actual control over the X stock attributed to them. Before the redemption T1, T2, T3, and T4 each owned, actually and constructively, 31 percent of the X stock and after the redemption each owned, solely by attribution under sections 318(a)(1)(A)(ii) and 318(a)(3)(B)(i), 33 percent of the X stock.
LAW AND ANALYSIS
Pursuant to section 302(c) of the Code section 318(a) applies in determining the ownership of stock for purposes of determining whether a redemption qualifies under section 302(a).
In United States v. Davis, 397 U.S. 301 (1970), rehearing denied, 397 U.S. 1071 (1970), Ct. D. 1937, 1970-1 C.B. 62, the Supreme Court of the United States, in considering whether a distribution was a redemption under section 302(b)(1) of the Code, held that the attribution rules were 'specifically applicable to the entire section, and * * * that Congress intended that they be taken into account * * *.'
Furthermore, the legislative history of section 318 of the Code indicates that before the enactment of the 1954 Code there was 'no specific statutory guidance * * * for stock ownership in the area of corporate distributions * * *.' In order to remove the uncertainties Congress provided, through section 318, 'precise standards whereby under specific circumstances, a shareholder may be considered as owning stock held by members of his family (* * * or trusts which he controls).' H.R. Rep. No. 1337, 83rd Cong., 2d Sess. A96 and 36 (1954).
In Robin Haft Trust, et al. v. Commissioner, 510 F.2d 43 (1st Cir. 1975), rev'g and remanding, 61 T.C. 309 (1973), supplemented, 62 T.C. 145 (1974), on facts similar to those set forth above, the court viewed the attribution rules as a presumption of continuing influence over corporate affairs and, therefore, because of the family hostility disregarded the attribution rules in testing the redemption of the taxpayers' stock for dividend equivalency. Such an interpretation is, however, inconsistent with both the legislative history of section 318 of the Code and the language and the rationale of Davis. The purpose of the attribution rules under section 318 was to replace the confusion of prior law with clear and objective standards for attribution of stock ownership among related shareholders. The facts and circumstances of a particular case cannot contradict the mechanical determination under section 318 of how much stock a shareholder owns.
Consequently, the Internal Revenue Service will not follow the decision of the United States Court of Appeals for the First Circuit in Haft. Also, the acquiescence in the decision in Estate of Squier v. Commissioner, 35 T.C. 950 (1961), acq., 1961-2 C.B. 5, upon which the decision in Haft relies, has been withdrawn and nonacquiescence substituted therefor. See 1978-2 C.B. 4.
HOLDING
The rules of attribution under section 318 of the Code are applicable in determining whether a distribution in redemption of stock qualifies under section 302(a). Therefore, in the instant case, pursuant to section 318, T1, T2, T3, and T4 each was the owner of 33 percent of the X stock after the redemption and, consequently, the redemption of the stock owned by T1, T2, T3, and T4 is not (i) a complete termination of interest in X within the meaning of section 302(b)(3); (ii) a substantially disproportionate redemption of stock within the meaning of section 302(b)(2); or (iii) a redemption not essentially equivalent to a dividend within the meaning of section 302(b)(1). Accordingly, the redemption is not a distribution in part or full payment in exchange for the X stock under section 302(a). Thus, under section 302(d), the redemption by X of the stock held by T1, T2, T3, and T4 is a distribution of property to which section 301 applies.
PROSPECTIVE APPLICATION
Pursuant to the authority contained in section 7805(b) of the Code, this revenue ruling will not be applied adversely to taxpayers who relied upon the acquiescence in Squier and who either (1) before the decision in Davis, March 23, 1970, consummated transactions under section 302 in which, pursuant to section 302(c)(1), section 318(a) applied, or (2) consummated such transactions after that date pursuant to the terms of a binding written contract entered into before that date if such terms were in effect on the date of the Davis decision.
Rev. Rul. 80-26, 1980-1 C.B. 66, 1980-4 I.R.B. 7.