ACC317 Advanced Federal Taxation

Accounting
Tutor: None Selected Time limit: 1 Day

The IRS has aggressively attacked basis shifting tax shelters involving nonqualified redemptions.   Discuss the potential issues involved in nonqualified redemptions and the progress of the IRS in attacking these shelters.

Oct 10th, 2015

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  • Stock Buybacks Stimulate Redemptions. Stock redemptions often are motivated by corporate reasons. For instance, when a corporation considers its stock undervalued, it may repurchase its shares through a “tender offer.” By reducing the number of shares outstanding, the corporation may be able to increase its earnings per share and related financial ratios. Although the purchase is motivated by corporate reasons, each redeeming shareholder must consider the qualifying stock redemption rules to determine whether sale or exchange treatment is available. In most cases, however, the shareholders redeeming stock in these buybacks hold small stakes in the corporation and, as such, are not hindered by the qualifying stock redemption requirements. See, Rev. Rul. 76-385, 1976-2 CB 92 (redemption of stock from shareholder with de minimis interest qualifies as a not essentially equivalent redemption). However, a de minimis shareholder will not qualify for § 302(b)(1) treatment if the redemption is pro rata with respect to all shareholder.
  • Stock Redemptions Incident to Divorce. Property transferred pursuant to a divorce under § 1041 results in no gain (or loss) to the transferor ex-spouse and a carryover basis to the recipient ex-spouse. The deferred gain/loss is typically recognized when the recipient disposes of the property in a taxable event. When the property is stock of a closely held corporation (e. g., wholly owned by one or both spouses), and the stock is redeemed pursuant to a divorce agreement, an alternative result can occur. In some cases, the redemption transaction will be treated as a distribution to the transferring spouse and a subsequent transfer of the proceeds to the recipient spouse. The transferring spouse’s remaining stock ownership in the corporation generally precludes qualifying stock redemption treatment, and the result is a dividend distribution to such spouse [See, Craven, 2002-2 USTC ¶50,541; 85 AFTR 2d 2000- 2229; 215 F 3d 1201 (CA-11, 2000); and Carol M. Read, 114 TC 14 (2000)]. Regulations for § 1041 permit taxpayers to establish the tax consequences associated with the redemption of stock pursuant to a divorce. Under Reg. § 1.1041-2(c), taxpayers can dictate in the divorce or separation instrument which spouse is be taxed on the stock redemption.  
IRS Progress:
You can check IRS progress by visiting this link

The IRS outlined actions and next steps to fix problems uncovered with the IRS’ review of tax-exempt applications and improve the wider processes and operations in place at the IRS. The report released by former Principal Deputy Commissioner Danny Werfel reflects important findings, aggressive actions and the next steps to help the IRS make improvements. Other documents give specific highlights of those findings and actions.

The following table represents the current status of recommended actions from the Treasury Inspector General for Tax Administration's (TIGTA) report on IRS's tax-exempt area. The status of the recommended actions will be updated monthly. Use the link in the Status column to view the historical updates for each recommendation.


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Oct 10th, 2015

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