Stock Sales Subject to Section 304, written by Clifford R. Gross, Esq., of Skadden, Arps, Slate, Meagher & Flom LLP, and Joseph M. Doloboff, Esq., of FTI Consulting, and revised by George C. Koutouras, Esq., of Alvarez and Marsal Taxand, LLC, and Mark Q. Tizabgar, Esq., of PricewaterhouseCoopers, discusses the tax rules governing a stock sale where (1) a person sells stock of a parent corporation to its subsidiary (a “parent-subsidiary” stock purchase), and (2) a person controls each of two corporations and sells stock of one corporation to the other corporation (a “brother-sister” stock purchase).
Section 304 governs these transactions and treats them as stock redemptions, not as stock sales to third persons, thus bringing into play the redemption provisions, the most important of which is §302.
This Portfolio examines the judicial and legislative background of §304 and provides a detailed discussion of the rules of §304, which Congress originally enacted to prevent the bailout of corporate earnings and profits as capital gain or return of capital via a sale of stock of one corporation to a related corporation, thereby avoiding the ordinary income tax on dividends.
This Portfolio also discusses the separate rules applicable to parent-subsidiary and brother-sister stock purchases and compares them, and it explores the interrelation of §304 with other sections of the Code.
Stock Sales Subject to Section 304 allows you to benefit from:
This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.
Detailed Analysis
I. Introduction
A. In General
B. Background
II. Parent-Subsidiary Stock Sales
Introductory Material
A. Prerequisites for Application of § 304(a)(2)
1. Control
a. What Constitutes Control?
b. Who Has Control?
(1) Constructive Stock Ownership
(2) Indirect Control
(3) Control by More Than One Person
(4) Disguised Stock Ownership
c. When Is Control Tested?
2. Property
B. Effect of § 304(a)(2)
1. Parent-Subsidiary Stock Purchase Treated as an Exchange
a. Section 302
(1) Section 302(b)(2) - Substantially Disproportionate Redemption
(2) Section 302(b)(3) - Complete Termination of Stockholder's Interest
(3) Section 302(b)(1) - Not Essentially Equivalent to a Dividend
(4) Section 302(b)(4) - Partial Liquidation Distribution in Redemption of the Stock of a Noncorporate Stockholder
b. Section 303
2. Parent-Subsidiary Stock Purchase Treated as a Distribution
3. Basis
a. Distribution
(1) Seller
(2) Purchaser
b. Sale or Exchange
4. Effect of Parent-Subsidiary Stock Purchase on Earnings and Profits
5. Gain to the Issuing or Acquiring Corporation
C. Relation to Other Provisions of the Code
1. Section 351 Transfers to Controlled Corporations
a. Transactions Under Current Law
b. Transactions Under Old Law
(1) Haserot v. Comr.
(2) Coates Trust Case
(3) Falkoff Case
(4) View of the Service
2. Reorganizations - § 368
3. Tax Consequences of International § 304 Transactions
a. Foreign Tax Credits and Withholding Taxes
b. Sections 367 and 1491
c. CFC Issues
d. PFIC Issues
4. Installment Sales - § § 453 and 453A
5. Consolidated Return Regulations
6. Small Business Stock
7. Extension of Time to Pay Estate Tax - § 6166
8. S Corporations
9. Inversions
D. Reporting Requirements
E. Ruling Requests
1. When a Ruling Should Be Sought
2. Procedure for Requesting a Ruling
3. No Ruling Areas
III. Brother-Sister Stock Sales
A. Prerequisites for Application of § 304(a)(1)
a. In General
b. Acquisition Indebtedness Exception
c. Bank Holding Company Exception
B. Effect of Section 304(a)(1)
1. Brother-Sister Stock Purchase Treated as an “Exchangeâ€
2. Brother-Sister Stock Purchase Treated as a Distribution
b. Transactions Subject to TEFRA
c. Transactions Occurring Before TEFRA
(a) Transactions Under Current Law
(b) Transactions Under Prior Law
4. Effect of Brother-Sister Stock Purchase on Earnings and Profits
b. Redemption
5. Gain to the Acquiring Corporation
3. International Tax Consequences of § 304 Transactions
4. Distribution of Stock of a Controlled Corporation - § 355
5. Section 306 Stock
6. Substantial Similarity to Fast-Pay Preferred
7. Stock Purchases Treated as Asset Acquisitions - § 338
8. Installment Sales - § § 453 and 453A
9. Small Business Stock
10. Extension of Time to Pay Estate Tax - § 6166
11. S Corporations
Working Papers
Table of Worksheets
Worksheet 1 Typical Parent-Subsidiary Stock Purchase
Worksheet 2 Typical Brother-Sister Stock Purchase
Worksheet 3 Statement of Assumed Facts on the Basis of Which a Brother-Sister Stock Redemption is Contemplated
Worksheet 4 Directors' Resolution Authorizing Stock Acquisition
Worksheet 5 Stock Purchase Agreement
Worksheet 6 Request for Ruling
Worksheet 7 Acquisition by a Subsidiary
Worksheet 8 Acquisition by a Sister Corporation
Worksheet 9 Acquisition by a Sister Corporation Treated as a Dividend
Worksheet 10 Acquisition by a Sister Corporation Treated as a Sale
Worksheet 11 Acquisition by a Subsidiary Corporation Treated as Dividend, Illustration I
Worksheet 12 Acquisition by a Subsidiary Corporation Treated as Dividend, Illustration II
Worksheet 13 Acquisition by a Subsidiary Corporation Treated as a Sale
Worksheet 14 H.R. Rep. No. 432, Pt. 2, 98th Cong., 2d Sess. (1984); H.R. Rep. No. 861, 98th Cong., 2d Sess. (1984)
Worksheet 15 General Explanation of the Amendments Made to Section 304 by the Tax Reform Act of 1984, by the Staff of the Joint Committee on Taxation, pp. 1000–1004
Worksheet 16 S. Rep. No. 530 (Conf. Rep.), 97th Cong., 2d Sess. (1982)
Worksheet 17 General Explanation of the Amendments Made to Section 304 by the Tax Equity and Fiscal Responsibility Act of 1982, by the Joint Committee on Taxation, pp. 141–144
Worksheet 18 H.R. Rep. No. 2319, 81st Cong., 2d Sess. 53 (1950)
Worksheet 19 H.R. Rep. No. 1337, 83d Cong., 2d Sess. 35–38 (1954)
Worksheet 20 S. Rep. No. 1622, 83d Cong., 2d Sess. 45–48 (1954)
Worksheet 21 H.R. Conf. Rep. No. 760, 97th Cong., 2d Sess. 409, 543 (1982)
Worksheet 22 H.R. Conf. Rep. No. 495, 100th Cong., 1st Sess. 499, 969–70 (1987)
Bibliography
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