Rev. Rul. 59-233
Advice has been requested whether the distribution by a corporation in redemption of all of its stock held by a trust is to be treated as the termination of a shareholder's interest within the meaning of sections 302(b)(3) and 302(c)(2) of the Internal Revenue Code of 1954, where the stock of the corporation was owned in its entirety by a husband and a trust created by the will of his deceased wife for the benefit of their children.
Section 302(a) of the Code provides, in part, that, if a corporation redeems its stock and if section 302(b)(3) of the Code applies to the redemption, such redemption shall be treated as a distribution in part or full payment in exchange for the stock. Section 302(b)(3) of the Code provides that section 302(a) of the Code shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.
Section 302(c) of the Code, relating to the constructive ownership of stock provides, in part, as follows:
(1) IN GENERAL.-Except as provided in paragraph (2) of this subsection, section 318(a) shall apply in determining the ownership of stock for the purposes of this section.
(2) FOR DETERMINING TERMINATION OF INTEREST.-
(A) In the case of a distribution described in subsection (b)(3), section 318(a)(1) shall not apply if-
(i) immediately after the distribution the distributee has no interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor,
(ii) the distributee does not acquire any such interest (other than stock by bequest or inheritance) within 10 years from the date of such distribution, and
(iii) the distributee, at such time and in such manner as the Secretary or his delegate by regulations prescribes, files an agreement to notify the Secretary or his delegate of any acquisition described in clause (ii) and to retain such records as may be necessary for the application of this paragraph.
Section 318 of the Code relative to constructive ownership of stock provides, in part, as follows:
(a) GENERAL RULE.-For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable-
(1) MEMBERS OF FAMILY.-
(A) IN GENERAL.-An individual shall be considered as owning the stock owned, directly or indirectly, by or for-
(i) his spouse * * *
(ii) his children, grandchildren and parents.
(2) PARTNERSHIP, ESTATES, TRUSTS, AND CORPORATIONS.-
(B) TRUSTS.-Stock owned, directly or indirectly, by or for a trust shall be considered as being owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries in such trust. Stock owned, directly or indirectly, by or for a beneficiary of a trust shall be considered as being owned by the trust * * *
The specific question presented is whether the trust can avail itself of the waiver of the family attribution rules provided for in section 302(c)(2) of the Code which requires, in part, that, in order for the provisions of section 318(a)(1) of the Code not to apply, the distributee must file an agreement of the type described in section 302(c)(2)(A)(iii) of the Code.
The legislative history of section 302(c)(2)(A) of the Code makes it clear that the waiver of family attribution rules is to be limited to cases where a distributee would be considered to own stock in the corporation, subsequent to the redemption, by virtue of the application of section 318(a)(1) of the Code to attribute stock owned, directly or indirectly, by members of his family to him. See Senate Report 1622, 83d Cong., pages 235-236. It was not intended that such rules should apply to cases where a distributee would be considered to own stock in a corporation subsequent to redemption by virtue of the application of section 318(a)(2) of the Code.
Accordingly, in the instant case, the trust is deemed to own the remaining stock by virtue of the application of section 318(a)(2)(B) of the Code and not by the application of section 318(a)(1) of the Code. Only the children (beneficiaries of the trust) are considered to own their father's stock by virtue of the application of section 318(a)(1) of the Code. Thus, the redemption of the stock owned by the trust cannot qualify as a redemption to be treated as a termination of interest under section 302(b)(3) of the Code, regardless of whether the trust has timely filed the agreement specified in section 302(c)(2)(A)(iii) of the Code.