Rev. Rul. 71-262

Advice has been requested whether, under the circumstances described below, a redemption of stock was in complete redemption of all of the stock owned by a shareholder within the meaning of section 302(b)(3) of the Internal Revenue Code of 1954.

A and his son, B, each own fifty percent of the stock of a corporation. They established a voting trust, with a designated unrelated voting trustee, and transferred all of their stock to the trust in return for voting trust certificates representing the number of shares transferred and to be held until termination of the trust at which time they were to be returned to the certificate holders.

Under the trust agreement, the trustee has legal title to the stock and has exclusive voting rights for the period of the trust. In addition, any cash dividends received by him are to be distributed to the certificate holders.

The corporation redeemed all of the stock represented by A's voting trust certificates for cash. He severed all interest in the corporation as an officer, director, or employee. The question presented is whether A or the trust was the owner of the stock and thus the redeeming shareholder for purposes of section 302 of the Code.

Section 302(a) of the Code provides, in part, that a redemption will be treated as a distribution in part or full payment in exchange for the stock if, pursuant to section 302(b)(3) of the Code, the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.

If the trust were the owner of the stock, the redemption would not qualify as a complete termination of interest under section 302(b)(3) of the Code since the trust would still continue to own B's stock in the corporation.

In the case of Federal Grain Corporation v. Commissioner, 18 B.T.A. 242 (1929), the United States Board of Tax Appeals held, in effect, that the placing of stock in the possession of the trustee of a voting trust, with the trustee having the right to vote and with the dividends collected by the trustee to be paid over to the certificate holders, did not affect the certificate holders' ownership of the stock.

Accordingly, A was owner of the stock in the corporation, and thus was the redeeming shareholder for purposes of section 302 of the Code. Therefore, provided A filed the agreement specified in section 302(c)(2)(A)(iii) of the Code at such time and in such manner as prescribed in section 1.302-4 of the Income Tax Regulations so as to qualify for waiver of attribution to him of the stock of the corporation owned by his son, B, the redemption of his stock of the corporation qualifies as a termination of interest under section 302(b)(3) of the Code.