CCA 200004007: Corporation recognizes no gain on its stock sale or cash redemption

Plain-English summary

Under a proposed Chapter 11 plan, a buyer would purchase shares from a corporation, and the purchase money would go to a trust to pay creditors and redeem the remaining shareholders for cash. Chief Counsel advised that the corporation would recognize no gain or loss on issuing its own stock for cash under § 1032(a). It would also recognize no gain or loss on the cash redemption under § 311, because cash is not appreciated property for § 311(b) purposes. The advice addressed tax consequences to the corporation from those two steps, not the tax treatment of the buyer, creditors, or redeeming shareholders.

Ruling snapshot

• Question: Would the proposed stock sale and cash redemption create taxable gain or loss for the corporation?
• Outcome: Advice given: no corporate gain or loss from either step.
• Key authorities: IRC §§ 1032(a), 311(a), 311(b), 317.

Full text (IRS public release)

                               DEPARTMENT OF THE TREASURY
                                 I N T E R N AL R E V E N U E S E R V I C E
                                      WASHINGTON, D.C. 20224
                                        October 12,1999


Number: 200004007
Release Date: 1/28/2000
CC:DOM:FS:CORP
GL-804844-99

UILC: 311.00-00
      311.02-00
      1032.00-00

  INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE


MEMORANDUM FOR                            DISTRICT COUNSEL
                       Attn:                  Attorney

FROM:                  Deborah Butler
                       Assistant Chief Counsel (Field Service) CC:DOM:FS

SUBJECT:               Taxability of Redemptions And Sales


This Field Service Advice responds to your memorandum dated July 22, 1999.
Field Service Advice is not binding on Examination or Appeals and is not a final
case determination. This document is not to be cited as precedent.


LEGEND:

 A                 =
 B                 =
 $a                =
 #b                =




ISSUE(S):

1 Whether there will be any tax consequences to A as a result of its proposed sale
of its stock to B.


2 Whether there will be any tax consequences to A as a result of its proposed
redemption of its stock from shareholders, other than B.

CONCLUSION:

1 There will be no tax consequences to A as a result of its proposed sale of the
stock to B.

2 There will be no tax consequences to A as a result of its proposed redemption of
its stock from shareholders other than B.


FACTS:

A as debtor and B have submitted a plan of reorganization pursuant to Chapter 11
of Title 11 of the United States Code.

Under the plan of reorganization of A as submitted to the Bankruptcy Court, the
following events will occur: B will acquire #b shares of A stock in exchange for
cash of approximately $a. Under the plan of reorganization, A will transfer such
purchase price to a trust which will first pay creditors, as determined by the
Bankruptcy Court proceedings, and then use the balance of the purchase price to
fund the redemption of the remaining A stock.

Since A will redeem all of the stock held by its present shareholders, at the
conclusion of the transaction, B will own all of the stock of A, and all of the other A
stock will have been redeemed.

LAW AND ANALYSIS

LAW

I.R.C. § 1032(a) provides that no gain or loss shall be recognized to a corporation
on the receipt of money or other property in exchange for stock (including treasury
stock) of such corporation.

I.R.C. § 311(a) provides, except as provided in subsection (b), no gain or loss shall
be recognized to a corporation on the distribution of property (not in complete
liquidation) with respect to its stock.

I.R.C. § 311(b) provides, if a corporation distributes property (other than obligation
of such corporation) to a shareholder in a distribution to which subpart A applies,
and the fair market value of such property exceeds its adjusted basis (in the hands


of the distributing corporation), then gain shall be recognized to the distributing
corporation as if such property were sold to the distributee at its fair market value.

I.R.C. § 317 provides that the term “property” means money, securities, and any
other property.

ANALYSIS

Stock Sale Issue 1

The issue is here whether there will be any tax consequences to A as a result of the
proposed stock sale to B.

I.R.C. § 1032(a) provides that no gain or loss shall be recognized to a corporation
on the receipt of money or other property in exchange for stock (including treasury
stock) of such corporation.

In the instant case, A exchanged its own stock for $a in cash. Therefore, under
I.R.C. § 1032(a) A should recognize no gain or loss on the sale or exchange of its
stock for cash.

Stock Redemption Issue 2

The issue here is whether there will be any tax consequences to A as a result of the
proposed redemption of its stock from shareholders other than B.

In general, no gain or loss shall be recognized to a corporation on the distribution of
property with respect to its stock. I.R.C. § 311(a). However, I.R.C. § 311(b)
provides, if a corporation distributes property (other than obligation of such
corporation) to a shareholder in a distribution to which subpart A applies, and the
fair market value of such property exceeds its adjusted basis (in the hands of the
distributing corporation), then gain shall be recognized to the distributing
corporation as if such property were sold to the distributee at its fair market value.

In the instant case, no gain or loss shall be recognized to A, on the distribution of
cash to its shareholders with respect to its stock.

In the instant case, A redeemed its stock from its shareholders (excluding B). As a
result of this redemption, A shareholders received cash in exchange for their A
stock. Cash always has a basis equal to its fair market value, therefore it can never
be appreciated property under I.R.C. § 311(b). Therefore, because the fair market
value of the cash property distributed by A does not exceed its basis, no gain or
loss will be recognized by A on the distribution of property with respect to its stock.


There are no tax consequences to A as a result of the proposed sale of its stock to
B, and there are no tax consequences to A as a result of the proposed redemption
of its stock from shareholders other than B.

CASE DEVELOPMENT HAZARDS AND OTHER CONSIDERATIONS




If you have any further questions, please call 622-7930.


                                             Deborah Butler
                                             Assistant Chief Counsel
                                             (Field Service)


                                       By:
                                             STEVEN HANKIN
                                             Special Counsel
                                             Field Service Corporate