A family company's redemption of one shareholder's stock will not be a deemed distribution under section 305

Plain-English summary

A privately held, family-owned corporation plans to buy back (redeem) all of one
family member's non-voting Class B shares for ordinary business reasons. Normally
a company redeeming shares does not create taxable income for the shareholders who
keep their stock. But section 305 has an anti-abuse rule: if a company runs a
series of redemptions that steadily bumps up some shareholders' percentage stake
while others receive cash, the IRS can treat the untouched shareholders as having
received a taxable "deemed distribution" of stock. The company asked the IRS to
confirm that this one-off redemption does not trigger that rule. The IRS agreed,
ruling that the redemption will not result in a deemed distribution under section
305 to any shareholder, pointing to the regulation's own examples of isolated
redemptions that are safe. This matters to closely held businesses that repurchase
shares during ownership shakeups and want assurance they are not handing the other
owners a surprise tax bill.

Ruling snapshot

• Question: Will the company's redemption of one shareholder's Class B stock cause a deemed distribution under section 305 to any of its shareholders?
• Outcome: Approved (favorable ruling: no deemed distribution)
• Key authorities: IRC § 305; Treas. Reg. § 1.305-3(e), Examples (10) and (11)

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202508001                                             Third Party Communication: None
 Release Date: 2/21/2025                                       Date of Communication: Not Applicable
 Index Number: 305.13-00
                                                               Person To Contact:
 ---------------------                                         -------------------------, ID No. -----------------
 ----------------------------------------------                -----------------------------------------------------
 ----------------------------                                  Telephone Number:
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 ----------------------------                                  Refer Reply To:
                                                               CC:CORP:B05
                                                               PLR-103918-24
                                                               Date:
                                                               August 23, 2024




                                                    Legend

Company                    =                 ----------------------------
                                            -------------------------------
                                            -----------------------

Shareholder 1              =                -------------------------------
                                            ----------------------------

Shareholder 2              =                ------------------------------------
                                            ----------------------------

State A                    =                -------------

Family                     =                ------------------------------------------------------

Date 1                     =                ----------------

x                          =                ------------


Dear ------------------:

      This letter responds to your letter dated January 24, 2024, on behalf of
Company, requesting a ruling on certain U.S. Federal income tax consequences of a
proposed redemption. The material information submitted in that request and
subsequent correspondence is summarized below.

      The rulings contained in this letter are based on facts and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party. This office has not verified any of the materials
PLR-103918-24                                 2

submitted in support of the request for rulings. Verification of the information,
representations and other data may be required as part of the audit process.

                                    Summary of Facts

      Company is a privately held State A corporation with all its stock (consisting of
Class A voting, Class B non-voting, and Class C non-voting) held by or for the benefit of
members of Family. Shareholder 1, a member of Family, holds Class A shares, Class B
shares and Class C shares. Shareholder 2, also a member of Family, formerly held
Class B shares but not Class A shares or Class C shares.

       On Date 1, Company entered into a redemption agreement with Shareholder 2,
(the "Prior Redemption"). The Prior Redemption was motivated by concerns about intra-
Family discord and Shareholder 2's continuing affiliation with Company.

       For unrelated business reasons, Company intends to redeem all of Shareholder
1's Class B stock (the "Redemption") within x months of Date 1. The Redemption and
the Prior Redemption are separately motivated, and each transaction would have been
undertaken whether or not the other transaction occurred. At the time the terms of the
Prior Redemption were agreed to, there was no fixed or firm plan to carry out the
Redemption. Currently, Company has no plan to make further offers to redeem stock
from any of its shareholders after the Redemption.

                                     Representations

     Company makes the following representations in connection with the
Redemption:

       (1) 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 any stock. The board of directors of
       Company has a fiduciary duty to Company and its shareholders to consider the
       appropriateness of any share repurchase and has not, in any manner,
       relinquished its discretion in carrying out its fiduciary duties.

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

       (3) 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.

       (4) 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.
PLR-103918-24                                3

       (5) 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.
                                         Rulings

       Based solely on the information and representations submitted, we rule as
follows:

       The Redemption will not result in a deemed distribution under section 305 with
       respect to any of Company's shareholders. See Treas. Reg. § 1.305-3(e),
       Examples (10) and (11).

                                         Caveats

        Except as expressly provided herein, no opinion is expressed or implied
concerning the tax treatment of the Redemption under other provisions of the Code or
the regulations, or the tax treatment of any conditions existing at the time of, or effects
resulting from, the Redemption or the Prior Redemption that are not specifically covered
by the above rulings. In particular, we express no opinion with respect to the income tax
treatment of the Redemption or the Prior Redemption to any shareholder under sections
301 or 302 of the Code. Further, we express no opinion on whether the Prior
Redemption will result in a deemed distribution to any of Company's shareholders under
section 305 of the Code.

                                Procedural Statements

      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.

       A copy of this letter must be attached to any income tax return to which it is
relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number (PLR-103918-24) of the letter ruling.
PLR-103918-24                                           4

         In accordance with the Power of Attorney on file with this office, a copy of this
letter is being sent to your authorized representatives.


                                                  Sincerely,



                                                  William W. Burhop
                                                  Acting Branch Chief, Branch 5
                                                  Associate Chief Counsel
                                                  (Corporate)

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