Rev. Rul. 72-471

Advice has been requested whether the redemption of stock, under the circumstances described below, qualifies as a termination of interest under section 302(b)(3) of the Internal Revenue Code of 1954.

A corporation has two shareholders, a trust and an individual. The sole beneficiary of the trust is the individual's mother and she is treated as the owner of the trust under section 678(a)(1) of the Code since she has a power exercisable solely by herself to vest the entire corpus and income therefrom in herself. The corporation redeemed all of the stock held by the trust. After the redemption, the mother had no interest in the corporation. The question presented is whether the mother or the trust is the "redeemed" 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 the stock of the corporation owned by the shareholder.

Section 671 of the Code provides, in part, that where a person is treated as the owner of any portion of a trust under section 678 of the Code there will be included in computing his taxable income and credits those items of income, deductions, and credits which are attributable to that portion of the trust to the extent such items would be taken into account in computing the taxable income or credits against the tax of an individual.

In the instant case, the mother, not the trust, would take the redemption distribution into account in computing her taxable income under sections 671 and 678 of the Code.

Accordingly, in the instant case the mother is considered the "redeemed" shareholder for purposes of section 302 of the Code. Therefore, provided the mother files 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 her of the stock of the corporation owned by her child, the redemption of her stock by the corporation qualifies as a termination of interest under section 302(b)(3) of the Code.

Compare Revenue Ruling 71-262, C.B. 1971-1, 110, which holds that the holder of a voting trust certificate is the owner of the shares of stock held by a voting trust and is the redeemed shareholder for purposes of section 302 of the Code.

Also compare Revenue Ruling 59-233, C.B. 1959-2, 106 which holds that where a trust is the owner of stock in a corporation, the trust cannot avail itself of the waiver of attribution rules of section 302(c)(2) of the Code in connection with a redemption of the stock owned by the trust. Also see Revenue Ruling 72-472, below.