Rev. Rul. 68-388

Advice has been requested whether, under the circumstances described below, there was a complete redemption of all of the stock owned by a shareholder within the meaning of section 302(b)(3) of the Internal Revenue Code of 1954.

A corporation has two shareholders, an estate and an individual. The sole beneficiary of the estate is the individual's mother. Under the constructive ownership of stock rules contained in section 318(a)(1)(A)(ii) of the Code, the son's stock is attributed to the mother, and, under section 318(a)(3)(A) of the Code, that stock in turn is attributed from the mother to the estate. Thus, under these provisions, the estate is considered to own 100 percent of the outstanding stock of the corporation.

The estate desired to have the corporation redeem all of the stock presently held by it. The estate, however, may not avail itself of the waiver provided for in section 302(c)(2) of the Code of the attribution rules under section 318(a)(1) of the Code. See Revenue Ruling 59-233, C.B. 1959-2, 106, which holds that such a waiver is limited to cases where the distributee is an individual to whom stock owned by members of his family is attributed, subsequent to the redemption, by virtue of the attribution rules in section 318(a)(1) of the Code. Hence, if the stock is redeemed from the estate, the redemption would not qualify as a termination of interest under section 302(b)(3) of the Code.

It is proposed, therefore, that the estate transfer all of its stock of the corporation to its beneficiary, the mother, and that the mother pay for the stock with the cash received from a simultaneous redemption by the corporation of such stock from her. The purpose of this transaction will be to have the mother file the agreement specified in section 302(c)(2)(A)(iii) of the Code so as to qualify for waiver of attribution to her of the stock of the corporation held by her son.

Under these facts, the transfer of stock from the estate to the mother and the simultaneous redemption from the mother will for Federal income tax purposes be considered transitory and without economic substance. In reality, the corporation will be considered to have redeemed the stock from the estate.

Accordingly, since the estate will own, directly and indirectly, 100 percent of the stock of the corporation both before and after the transaction, the redemption will fail to qualify as a complete redemption within the meaning of section 302(b)(3) of the Code.