Rev. Rul. 72-472

Advice has been requested whether, under the circumstances described below, there is a termination of a trust's interest in a corporation under section 302(b)(3) of the Internal Revenue Code of 1954.

The stock of a corporation is owned by three shareholders, a father, his son, and a trust of which the son is the sole income beneficiary and remainderman. Neither the father nor the son are considered the owners of the trust under Subpart E of Subchapter J of Chapter I of the Code. The corporation redeemed all of its stock that was owned by the son and the trust. The son filed the agreement provided for in section 302(c)(2)(A)(iii) of the Code and otherwise complied with the requirements of section 302(c)(2) of the Code which provides for the waiver of family attribution under certain circumstances.

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

Section 302(c) of the Code, relating to the constructive ownership of stock provides, in part, as follows:

(1) IN GENERAL.--Except as provided in paragraph (2) of this subsection, section 318(a) shall apply in determining the ownership of stock for purposes of this section.

(2) FOR DETERMINING TERMINATION OF INTEREST.--

(A) In the case of a distribution described in subsection (b)(3), section 318(a)(1) shall not apply if--

(i) immediately after the distribution the distributee has no interest in the corporation (including an interest as officer, director or employee), other than an interest as a creditor,

(ii) the distributee does not acquire any such interest (other than stock acquired by bequest or inheritance) within 10 years from the date of such distribution, and

(iii) the distributee, at such time and in such manner as the Secretary or his delegate by regulations prescribes, files an agreement to notify the Secretary or his delegate of any acquisition described in clause (ii) and to retain such records as may be necessary for the application of this paragraph.

Section 318 of the Code relating to constructive ownership of stock provides, in part, as follows:

(a) GENERAL RULE.--For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable--

(1) MEMBERS OF FAMILY.--

(A) IN GENERAL.--an individual shall be considered as owning the stock owned, directly or indirectly, by or for

(i) his spouse * * *

(ii) his children, grandchildren, and parents

* * * * * *

(3) ATTRIBUTION TO PARTNERSHIPS, ESTATES, TRUSTS AND CORPORATIONS.--

* * * * * *

(B) TO TRUSTS.--

(i) Stock owned, directly or indirectly, by or for a beneficiary of a trust * * * shall be considered as owned by the trust, unless such beneficiary's interest in the trust is a remote contingent interest. * * *

Since the son complied with the requirements of section 302(c)(2) of the Code, section 318(a)(1) of the Code does not apply to attribute the stock owned by the father to the son and, therefore, the redemption of the son's stock qualifies as a termination of interest under section 302(b)(3) of the Code. However, the son's compliance with the requirements of section 302(c)(2) of the Code results in the son not being considered as owning his father's stock solely for the purpose of determining whether the distribution in redemption of his stock terminates his interest under section 302(b)(3) of the Code. Section 302(c)(2) of the Code eliminates family attribution to an individual for the sole purpose of determining his individual interest for the redemption of his own stock under section 318(a)(1) of the Code but does not eliminate family attribution for other purposes. Thus, notwithstanding the son's compliance with the requirements of section 302(c)(2) of the Code, he is still considered as owning his father's stock for the purposes of section 318(a)(3)(B)(i) of the Code, and the constructive stock ownership by the son of the father's stock is reattributed to the trust.

Accordingly, the trust's interest is not terminated under section 302(b)(3) of the Code since immediately after the redemption of its stock it will be considered as owning the father's stock owned indirectly by the son. Furthermore, the trust is not entitled to avail itself of the waiver of family attribution rules provided in section 302(c)(2) of the Code since these rules apply only to individual distributees. See Revenue Ruling 59-233, C.B. 1959-2, 106.