PLR 200521023: Isolated stock redemption creates no deemed distributions for other holders

Plain-English summary

A privately held company proposed to redeem part of one shareholder's nonvoting stock for a business reason. It represented that the redemption was a single, isolated transaction, not part of a plan to periodically increase other shareholders' stakes. The IRS ruled that the shareholders who did not sell stock would not receive deemed distributions under IRC § 305. The ruling depended on the company's representations and did not decide how the selling shareholder would be taxed under IRC §§ 301 or 302.

Ruling snapshot

• Question: Would the one-time redemption create deemed distributions for shareholders who kept their stock?
• Outcome: Approved: no deemed distributions under § 305 on the stated facts.
• Key authorities: IRC § 305; Treas. Reg. § 1.305-3(e), Examples 10 and 11; Rev. Rul. 77-19.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200521023
[Third Party Communication:
Release Date: 5/27/2005
Date of Communication: Month DD, YYYY]
Index Number: 305.13-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:CORP:B06
PLR-162872-04
Date:
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February 23, 2005

Legend

Company = -------------------
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Family 1 = ---------------------

Family 2 = ----------------------

Shareholder = ------------------------------
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$x = -------------

aa = -----------

Dear ----------------

This is in reply to your letter dated November 23, 2004, requesting a ruling under section 305 of the Internal Revenue Code. Additional information was received in a letter dated February 2, 2005. The relevant information submitted in the request and subsequent correspondence is summarized below.

Company is a privately held holding company with all of its stock (consisting of Class A voting and Class B nonvoting) held by or for the benefit of members of Family 1 and Family 2. Shareholder, a member of Family 1, holds aa shares of Company Class B stock.

For a valid business reason, Company proposes a one time partial redemption of a number of Shareholder’s Class B stock having a fair market value of $x (the “Redemption”).
PLR-162872-04
2

In connection with the proposed redemption, Company makes the following representations:

(a) Company is not required by its charter, bylaws or otherwise to redeem any of its stock, and the shareholders of Company have no right to require Company to make a tender offer or otherwise redeem its stock. The Board of Directors of Company has a fiduciary duty to Company and its shareholders to consider the appropriateness of any share repurchase. The Board of Directors of Company has not, in any manner, relinquished its discretion in carrying out its fiduciary duties.

(b) The Redemption is an isolated transaction and is not related to any other past or future transactions.

(c) The Redemption is motivated solely by Company’s business considerations and is not motivated by any intent of Company to confer a Federal income tax benefit on any shareholder.

(d) The Redemption is not part of a plan to periodically increase the proportionate share of any shareholder in the assets or earnings and profits of Company.

(e) At the present time, Company has no plan to make any further redemptions subsequent to the Redemption. However, it is possible that Company will make additional redemptions in future years based on circumstances prevailing at that time.

Based solely on the information submitted and the representations made, we rule on the application of section 305 of the Code to the proposed redemption as follows:

The Redemption (i) will constitute a single isolated transaction with respect to Shareholder, (ii) is not part of a periodic plan of redemption and (iii) will not cause the nonredeeming shareholders to receive any deemed distributions under section 305 of the Code. See section 1.305-3(e), Examples (10) and (11), of the Income Tax Regulations. See also Rev.
Rul. 77-19, 1977-1 C.B. 84.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we express no opinion as to the Federal income tax treatment to Shareholder of the Redemption under sections 301 or 302 of the Code.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
PLR-162872-04
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A copy of this letter must be attached to any income tax return to which it is relevant.

The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for the ruling, it is subject to verification on examination.

Sincerely,

Mark J. Weiss

Mark J. Weiss
Acting Assistant to the Branch Chief, B06 Office of Associate Chief Counsel (Corporate)