26 C.F.R. § 1.302-2

Redemptions not taxable as dividends

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(a) In general. The fact that a redemption fails to meet the requirements of paragraph (2), (3) or (4) of section 302(b) shall not be taken into account in determining whether the redemption is not essentially equivalent to a dividend under section 302(b)(1). See, however, paragraph (b) of this section. For example, if a shareholder owns only nonvoting stock of a corporation which is not section 306 stock and which is limited and preferred as to dividends and in liquidation, and one-half of such stock is redeemed, the distribution will ordinarily meet the requirements of paragraph (1) of section 302(b) but will not meet the requirements of paragraph (2), (3) or (4) of such section. The determination of whether or not a distribution is within the phrase “essentially equivalent to a dividend” (that is, having the same effect as a distribution without any redemption of stock) shall be made without regard to the earnings and profits of the corporation at the time of the distribution. For example, if A owns all the stock of a corporation and the corporation redeems part of his stock at a time when it has no earnings and profits, the distribution shall be treated as a distribution under section 301 pursuant to section 302(d).

(b) Redemption not essentially equivalent to a dividend—(1) In general. The question whether a distribution in redemption of stock of a shareholder is not essentially equivalent to a dividend under section 302(b)(1) depends upon the facts and circumstances of each case. One of the facts to be considered in making this determination is the constructive stock ownership of such shareholder under section 318(a). All distributions in pro rata redemptions of a part of the stock of a corporation generally will be treated as distributions under section 301 if the corporation has only one class of stock outstanding. However, for distributions in partial liquidation, see section 302(e). The redemption of all of one class of stock (except section 306 stock) either at one time or in a series of redemptions generally will be considered as a distribution under section 301 if all classes of stock outstanding at the time of the redemption are held in the same proportion. Distributions in redemption of stock may be treated as distributions under section 301 regardless of the provisions of the stock certificate and regardless of whether all stock being redeemed was acquired by the stockholders from whom the stock was redeemed by purchase or otherwise.

(2) Statement. Unless § 1.331-1(d) applies, every significant holder that transfers stock to the issuing corporation in exchange for property from such corporation must include on or with such holder's return for the taxable year of such exchange a statement entitled, “STATEMENT PURSUANT TO § 1.302-2(b)(2) BY [INSERT NAME AND TAXPAYER IDENTIFICATION NUMBER (IF ANY) OF TAXPAYER], A SIGNIFICANT HOLDER OF THE STOCK OF [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER (IF ANY) OF ISSUING CORPORATION].” If a significant holder is a controlled foreign corporation (within the meaning of section 957), each United States shareholder (within the meaning of section 951(b)) with respect thereto must include this statement on or with its return. The statement must include—

(i) The fair market value and basis of the stock transferred by the significant holder to the issuing corporation; and

(ii) A description of the property received by the significant holder from the issuing corporation.

(3) Definitions. For purposes of this section:

(i) Significant holder means any person that, immediately before the exchange—

(A) Owned at least five percent (by vote or value) of the total outstanding stock of the issuing corporation if the stock owned by such person is publicly traded; or

(B) Owned at least one percent (by vote or value) of the total outstanding stock of the issuing corporation if the stock owned by such person is not publicly traded.

(ii) Publicly traded stock means stock that is listed on—

(A) A national securities exchange registered under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f); or

(B) An interdealer quotation system sponsored by a national securities association registered under section 15A of the Securities Exchange Act of 1934 (15 U.S.C. 78o-3).

(iii) Issuing corporation means the corporation that issued the shares of stock, some or all of which were transferred by a significant holder to such corporation in the exchange described in paragraph (b)(2) of this section.

(4) Cross reference. See section 6043 of the Internal Revenue Code for requirements relating to a return by a liquidating corporation.

(c) Basis adjustments. In any case in which an amount received in redemption of stock is treated as a distribution of a dividend, proper adjustment of the basis of the remaining stock will be made with respect to the stock redeemed. (For adjustments to basis required for certain redemptions of corporate shareholders that are treated as extraordinary dividends, see section 1059 and the regulations thereunder.) The following examples illustrate the application of this rule:

Example 1.A, an individual, purchased all of the stock of Corporation X for $100,000. In 1955 the corporation redeems half of the stock for $150,000, and it is determined that this amount constitutes a dividend. The remaining stock of Corporation X held by A has a basis of $100,000.Example 2.H and W, husband and wife, each own half of the stock of Corporation X. All of the stock was purchased by H for $100,000 cash. In 1950 H gave one-half of the stock to W, the stock transferred having a value in excess of $50,000. In 1955 all of the stock of H is redeemed for $150,000, and it is determined that the distribution to H in redemption of his shares constitutes the distribution of a dividend. Immediately after the transaction, W holds the remaining stock of Corporation X with a basis of $100,000.Example 3.The facts are the same as in Example (2) with the additional facts that the outstanding stock of Corporation X consists of 1,000 shares and all but 10 shares of the stock of H is redeemed. Immediately after the transaction, H holds 10 shares of the stock of Corporation X with a basis of $50,000, and W holds 500 shares with a basis of $50,000.

(d) Effective/applicability date. Paragraphs (b)(2), (b)(3) and (b)(4) of this section apply to any taxable year beginning on or after May 30, 2006. However, taxpayers may apply paragraphs (b)(2), (b)(3) and (b)(4) of this section to any original Federal income tax return (including any amended return filed on or before the due date (including extensions) of such original return) timely filed on or after May 30, 2006. For taxable years beginning before May 30, 2006, see § 1.302-2 as contained in 26 CFR part 1 in effect on April 1, 2006.

[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 8724, 62 FR 38028, July 26, 1997; T.D. 9264, 71 FR 30593, May 30, 2006; T.D. 9329, 72 FR 32796, June 14, 2007]

Notes of Decisions

Cited in 28 cases, 1959–2014 · leading case: Metzger Trust v. Comm'r, 76 T.C. 42 (Tax Ct. 1981).

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Metzger Trust v. Comm'r, 76 T.C. 42 (Tax Ct. 1981). · cites it 12× “The leading case interpreting section 302(b)(1) is United States v. Davis , 397 U.S. 301 (1970) .”

Reddam v. Comm'r, 2012 T.C. Memo. 106 (Tax Ct. 2012). · cites it 8× “41 of basis from Cormorant's Deutsche Bank stock to petitioner's Deutsche Bank shares and options. Petitioner asserts that the basis shift is in accord with the tax laws; in particular, section 302(a) and section 1.”

Cerone v. Comm'r, 87 T.C. 1 (Tax Ct. 1986). · cites it 10× “The First Circuit construed Davis as not requiring that the dividend equivalency inquiry end after taking into account the attribution rules. It pointed out that section 1.”

Est. of Lammerts v. Comm'r, 54 T.C. 420 (Tax Ct. 1970). · cites it 6× “The regulations under section 302 , in pertinent part, contain the following statements: Sec. 1.”

Comm'r v. Fink, 483 U.S. 89 (1987). · cites it 2× “§§ 302 (a), (b), (d); 26 CFR § 1.302-2 (c) (1986). Because the Finks' surrenders resulted in only a slight reduction in their ownership percentage, they would not have been entitled to an immediate loss if they had received consideration for the surrendered shares.”

Reddam v. Comm'r, 755 F.3d 1051 (9th Cir. 2014). · cites it 2× “See § 302(a); 26 C.F.R. § 1.302-2 (c). Hence, after fees and divisions between the various entities, Reddam claimed a basis of $43,800,000 in his Deutsche Bank shares, despite having directly purchased only $2,500,000 worth of shares.”

Est. of Runnels v. Comm'r, 54 T.C. 762 (Tax Ct. 1970). · cites it 4× “5, 1958); sec. 1.302-2 (b), Income Tax Regs. A variety of factors have been considered by the courts, the most important of which are whether the distribution was pro rata among the shareholders -- generally a decisive factor, sec.”

Decker v. Comm'r, 32 T.C. 326 (Tax Ct. 1959). · cites it 2× “-- Except as otherwise provided in this subchapter, if a corporation redeems its stock (within the meaning of section 317(b)), and if subsection (a) of this section does not apply, such redemption shall be treated as a distribution of property to which section 301 ↩ applies.”

Kerr v. Comm'r, 38 T.C. 723 (Tax Ct. 1962). · cites it 2× “Commissioner , 116 F. 2d 937 , 939 (C.A.D.C. 1940) , affirming a Memorandum Opinion of this Court, they have established certain judicial criteria which have proven useful in determining the net effect of the distribution which, in actuality, is the fundamental question.”

Fehrs Fin. Co. v. Comm'r, 58 T.C. 174 (Tax Ct. 1972). · cites it 2× “" To meet this test, a redemption must result in a meaningful reduction of the shareholder's proportionate interest in the corporation, after applying the attribution rules of section 318(a) to the stock ownership interests as they existed both before and after the red emption.”

Himmel v. Comm'r, 41 T.C. 62 (Tax Ct. 1963). · cites it 2× “" Sec. 1.302-2(b), Income Tax Regs. ↩ 4. The Second Circuit has taken an exceedingly dim view of the relevancy of the "legitimate corporate business purpose.”

Henry T. Patterson Trust, by Its Tr., the Reeves Banking & Trust Co. v. United States, 729 F.2d 1089 (6th Cir. 1984). “1958); 26 C.F.R. 1.302-2(b) (Treasury Regulations).”

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— 26 C.F.R. § 1.302-2(b) — 1 case

Henry T. Patterson Trust, by Its Tr., the Reeves Banking & Trust Co. v. United States, 729 F.2d 1089 (6th Cir. 1984). “1958); 26 C.F.R. 1.302-2(b) (Treasury Regulations).”

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