Rev. Proc. 81-62

SECTIONS 302 and 311 CHECKLIST QUESTIONNAIRE

CONTENTS

1. PURPOSE

The purpose of this revenue procedure is to update Rev. Proc. 73-35, 1973-2 C.B. 490, which sets forth in a convenient checklist questionnaire the information necessary to be included in a request for a ruling under sections 302 and 311 of the Internal Revenue Code regarding distributions in redemption of stock.

Sec. 2. Background.

The Internal Revenue Service receives many requests for rulings in which the information furnished as to the proposed transaction is not complete enough to permit a determination to be made. In such cases it is necessary to secure additional facts from the taxpayer before the ruling request can be considered. This procedure is time consuming for both Service personnel and taxpayers and delays issuance of the final ruling letter. This checklist will facilitate the filing of requests for rulings under sections 302 and 311 of the Code by showing specific information which should be included so that the application will be as complete as possible when originally filed. However, since the information necessary to rule on a particular transaction depends upon all the facts and circumstances of that case, information in addition to that suggested in this revenue procedure may be required. Nevertheless, careful use of the checklist should avoid much needless delay and permit rulings to be issued sooner.

The authority and general procedures of the National Office of the Service and of the Office of the District Directors of Internal Revenue with respect to the issuance of advance rulings and determination letters are outlined in Rev. Proc. 80-20, 1980-1 C.B. 633, as amended by Rev. Proc. 81-33, page 564, this Bulletin. See also Rev. Proc. 81-10, 1981-1 C.B. 647. Careful attention to all the requirements of those revenue procedures will serve to minimize needless delays in processing requests for rulings.

Sec. 3. Changes to Rev. Proc. 73-35.

.01 Section 1 has been changed to indicate that the purpose of the revenue procedure is to update Rev. Proc. 73-35.

.02 Sections 2, 4, and 5 and the index have been modified by substituting more complete and updated numbering and references and by consolidating certain material. The present sections 4 and 5 incorporate material found in section 3 of the prior revenue procedure.

.03 Section 4 has been written as a separate section to deal with the threshold question of section 302 nonapplicability to the extent sections 303 or 346 apply to the distribution.

.04 Section 5 has been modified to emphasize the desirability of providing all the information requested in the checklist, or, if appropriate, briefly stating why a checklist item is believed to be nonapplicable.

.05 Section 5.01-3 has been expanded regarding whether the identical issue presented in the ruling request is, or has been, under consideration elsewhere in the Service.

.06 Section 5.02-1 has been expanded to request a description of the entire capital structure of the Corporation and includes some material found in other portions of the prior revenue procedure. More detailed information is requested where debt instruments of the Corporation are distributed to the Redeemed Shareholder.

.07 Section 5.03 is a new section directed at obtaining facts needed to understand the full context of other transactions and relatinships within which the redemption arises. In part, this incorporates material found in other portions of the prior revenue procedure.

.08 Section 5.04 (previously 3.03) has been reordered so that it deals first with section 302(b)(3) of the Code (section 5.04-1), then section 302(b)(2) of the Code (section 5.04-2), and then section 302(b)(1) of the Code (section 5.04-3). Reflecting the present Code, it no longer includes a special provision for certain railroad corporation stock. It no longer discusses section 303 of the Code since section 303 is now found in section 4.01. Especially for section 302(b)(1) of the Code, the information requested is specified in more detail.

.09 Section 5.05 consolidates material regarding any loss that will be incurred by a Redeemed Shareholder in the redemption, and information concerning qualification for use of the installment method in reporting gain from the redemption where the redemption is treated as an exchange.

.10 Section 5.06-1 has been modified by replacing the term "cash" with "United States cash".

.11 Section 5.06-7 has been expanded to request more detailed information where property distributed by the Corporation will be leased back to the Corporation.

Sec. 4. Applicability Of Section 302 Of The Code Precluded To Extent Sections 303 Or 346 Apply.

To the extent the distribution comes within the terms of sections 303 or 346 of the Code, section 302 does not apply to the distribution.

.01 Section 303. Distribution in redemption to pay death taxes.--If the stock redeemed was included in a decedent's gross estate, see section 303 of the Code which treats such redemptions under certain circumstances as in full payment in exchange for the stock so redeemed.

.02 Section 346. Distribution in a partial liquidation in whole or in part.--If any part of the distribution will qualify as a partial liquidation under section 346 of the Code, state the amount and reasons why it qualifies under section 346. See Rev. Proc. 81-42, page 611, this Bulletin.

Sec. 5. Information to Be Included in Requests for Rulings under Sections 301 and 311 of the Code.

Each of the items included in this section should be specifically dealt with in the application even though some may not appear to be applicable. Presentation of the information required should follow the format of this revenue procedure as closely as possible with appropriate descriptive headings. If an item is believed not to be applicable, say so, and briefly explain why it does not apply. Processing ruling requests is significantly expedited by providing all the information requested in exactly the order in which it is requested herein.

.01 Information regarding the corporation that is redeeming its stock.

1. Identification.--Name, taxpayer identification number, and place and date of incorporation of the corporation that is redeeming its stock (Corporation).

2. Business.--Brief description of the business of the Corporation.

3. Jurisdiction.--Identify the District Office that will have audit jurisdiction over the return of the Corporation and state whether to the best of the knowledge of the taxpayer and the taxpayer's representative(s), if any, the identical issue is in a return of the taxpayer (or of a related taxpayer within the meaning of section 267 of the Code, or a member of an affiliated group of which the taxpayer is also a member within the meaning of section 1504) and, if so, whether the issue (1) is being examined by a District Director, (2) has been examined and the statutory period of limitation on assessment or refund of tax has not expired or a closing agreement covering the issue or liability has not been entered into by a District Director, (3) is being considered by an Appeals office in connection with the taxpayer's return for an earlier period, or that issue has been considered by an Appeals office and the statutory period of limitation on assessment or refund of tax has not expired or a closing agreement covering the issue or liability has not been entered into by an Appeals office, or (4) is pending in litigation in a case involving the taxpayer or a related taxpayer. The request must contain a statement whether, to the best of the knowledge of the taxpayer and the taxpayer's representative(s), the identical or similar issue has been ruled on by the Service to the taxpayer or to the taxpayer's predecessor and, if so, when and with what results. If after the request is filed but before a ruling is issued, the taxpayer knows that an examination of the issue by a District Director has been started, the taxpayer must notify the National Office of such action. If a return is filed before a ruling is received from the National Office concerning the return, a copy of the request must be attached to the return. This alerts the District Office and avoids premature action by that office on the issue.

4. Financial Statement.--Submit the most recent balance sheet of the Corporation.

.02 Description of Corporation's capital structure and ownership of Corporation's stock.

1. Description of capital structure.

(a) In general.--Furnish a complete description of each class of the Corporation's stock outstanding, setting forth the rights and privileges of each class. Also describe all other outstanding capital (bonds, debentures, notes, warrants, options, etc.), and briefly explain why each of these items should or should not be considered a stock interest. Describe in detail the terms of any outstanding indebtedness that was not incurred in the ordinary course of business. Applying the constructive ownership rules of section 318(a) of the Code, show the relationship between the shareholders and the creditors of the Corporation. Similarly, describe any new debt or equity that the Corporation anticipates issuing.

(b) Distribution of obligations of the Corporation.--If notes or other obligations of the Corporation will be distributed to a shareholder whose stock is being redeemed (a Redeemed Shareholder), furnish the following:

(1) Copy.--Provide a copy or prototype of the instrument which sets forth its terms.

(2) Period of payments.--Give the beginning and ending payment dates. Indicate whether, in all events, the last payment will be made no more than 15 years from the date of redemption. See sec. 4.01-4 of Rev. Proc. 81-10.

(3) Payment of Fixed Amount.--State whether the amount to be paid is a set amount payable at a set time, and whether the amount or the time of payment is subject to any change or adjustment. If all or part of the consideration from the Corporation to the Redeemed Shareholder is contingent upon the future earnings of the Corporation over a period of years or some other presently indeterminate factor, furnish all the terms of the contingent payments and reasons why they should not be considered an equity interest in the Corporation.

(4) Financial statements.--Submit profit and loss statements and balance sheets for the latest three years.

(5) Subordination.--Submit a statement as to whether the note or instrument is subordinate to the claims of general creditors.

(6) Default.--Indicate whether, in event of default on the note or other instrument, the Redeemed Shareholder will in any way receive stock in the Corporation. Will the stock redeemed revert to, or be received by, the Redeemed Shareholder, or will the Redeemed Shareholder be permitted to purchase the stock at a private or public sale? See Sec. 3.01-11 of Rev. Proc. 81-10.

2. Ownership of stock before the redemption.

(a) Shares actually owned.--The total actual number of shares of each class of stock outstanding immediately before the redemption, and the actual number of shares of each class owned by each shareholder immediately before the redemption. However, if the stock is widely held, the number of shares owned by each shareholder may be limited to those shareholders whose stock is being redeemed and those shareholders whose stock is attributed, under section 318(a) of the Code, to a Redeemed Shareholder.

(b) Shares constructively owned.--State the number of shares constructively owned by each Redeemed Shareholder and the relationship under section 318(a) of the Code of any person or entity whose stock is attributed to the Redeemed Shareholder. In determining stock constructively owned by each Redeemed Shareholder under section 318(a), ownership may be attributed any number of times from one individual or entity to another as provided in section 318(a)(5)(A). However, observe the exception in section 318(a)(5)(B) with respect to double attribution among members of the family under section 318(a)(1) and the exception in section 318(a)(5)(C) with respect to so-called sidewise attribution to (under section 318(a)(3)) and from (under section 318(a)(2)) a partnership, estate, trust, or corporation.

Also observe the exceptions to constructive ownership to (under section 318(a)(3) of the Code) and from (under section 318(a)(2)) an employees' trust described in section 401(a) which is exempt from tax under section 501(a) and to a trust (under section 318(a)(3)) when the beneficiary's interest is a remote contingent interest. If it is contended a trust is such an employees' trust or a beneficiary's interest is a remote contingent interest, submit information to support such contention.

(1) Section 318(a)(1) of the Code: family attribution.--When the Redeemed Shareholder is an individual, indicate the number of shares of stock of the Corporation owned actually and constructively under section 318(a) by members of the family of the Redeemed Shareholder described in section 318(a)(1).

(2) Section 318(a)(2) of the Code: attribution from a partnership, estate, trust, or corporation.--Indicate the number of shares of stock of the Corporation owned actually and constructively under section 318(a) by any partnership, estate, trust, or corporation in which the Redeemed Shareholder has an interest and the interest of the Redeemed Shareholder in each of these entities (including constructive ownership under section 318(a) when the entity is a corporation).

(3) Section 318(a)(3) of the Code: attribution to a partnership, estate, trust or corporation.--Indicate the number of shares of stock of the Corporation owned actually and constructively under section 318(a) by any of the partners if the Redeemed Shareholder is a partnership, or by any of the beneficiaries if the Redeemed Shareholder is a trust or estate, or by any of the shareholders, who owns actually or constructively, under section 318(a), 50 percent or more of the stock of the Redeemed Shareholder, if the Redeemed Shareholder is a corporation.

(4) Section 318(a)(4) of the Code: options to acquire stock of the Corporation.--Identify the holder of any rights or options (including those in the form of convertible debentures and stock rights or warrants) to acquire stock of the Corporation and the relationship, direct or indirect, under section 318(a) of the holder of such options to each of the Redeemed Shareholders.

(c) Percent of stock owned.--Indicate the percent of each class of stock of the Corporation owned actually and constructively, as determined in 5.02-2(a) and (b) above, by each shareholder of the Corporation immediately before the redemption.

3. Stock to be redeemed.--State the number of shares of each class of stock to be redeemed from each shareholder of the Corporation listed in 5.02-2(a) above.

4. Ownership of stock after the redemption.--Indicate the number of shares of each class of stock of the Corporation owned actually and constructively by each shareholder and the total number of shares and the percentage of each class of stock owned actually and constructively by each Redeemed Shareholder immediately after the redemption determined in the same manner and including the same information as required in 5.02-2 above.

.03 Other Relationships or Transactions.--Information showing the complete factual background relating to the redemption of each Redeemed Shareholder.

1. Other relationships between the Corporation and any Redeemed Shareholder.--With regard to each Redeemed Shareholder state whether such shareholder was, or will be, an employee of, an officer of, or in any way related to the Corporation. Give details of any agreements between the Redeemed Shareholder and the Corporation such as an employment contract, covenant not to compete, etc., and state whether such agreements had an effect upon the amount of property to be distributed in the redemption. Describe any property a Redeemed Shareholder will transfer or surrender in the transaction other than stock of the Corporation and the consideration to be received in exchange therefor. State whether any part of the consideration from the Corporation will be received by a Redeemed Shareholder as a creditor, employee, or in some capacity other than as a Redeemed Shareholder.

2. Agreements Between Shareholders.--State whether there are, or have been, any agreements between a Redeemed Shareholder and other shareholders as to the acquisition or disposition of the stock to be redeemed such as buy-sell agreements and options. If so, describe fully.

3. Other Transactions.

(a) Transactions involving the Corporation.--State whether the transaction is an isolated redemption. State whether there have been, or will be, any related transactions of any type. Describe all redemptions and issuances of stock in the Corporation occurring in the last ten years. State whether there is any plan or intent for there to be any redemption or issuance of stock in the future. If any redemptions or issuances are planned, describe the transaction, the number and type of shares, the section 318(a) relationship of the parties to any other shareholders, and the consideration to be paid or received in exchange for stock.

(b) Transactions involving any related corporation.--State whether there were, or will be, any distributions, redemptions, or issuances of stock of any related corporation.

(c) Transactions involving any Redeemed Shareholder.--State whether any Redeemed Shareholder has or will sell or acquire any stock in the Corporation or any related corporation either directly or constructively. If any stock of the Corporation will be sold or otherwise disposed of other than in the redemption by any shareholder of the Corporation simultaneously with or shortly before or after the redemption, state the number of shares of each class, identify the parties to the transaction, the relationship of such parties and their relationship to any Redeemed Shareholder within the meaning of section 318(a) of the Code, and the consideration to be received in exchange therefor. State whether the sale or disposition of such stock has been considered consummated in computing the ownership of stock before and after the redemption in 5.02-2 and 4 above. State whether the Corporation will be liable, directly or indirectly, for a part or all of the buyer's obligation in any such purchase of stock.

4. In General. Describe any relationship or transaction between the Corporation and the Redeemed Shareholder, and describe any transaction by either the Corporation or the Redeemed Shareholder, if such relationship or transaction affects the Redeemed Shareholder's percentage ownership of any class of the Corporation's stock, regardless of whether the transaction or relationship is past or contemplated or not considered related to the redemption.

.04 Information to determine whether the redemption is an exchange or a dividend.

1. Termination of shareholder's interest.

(a) Complete termination of shareholder's stock interest.--Indicate those Redeemed Shareholders who will not own any stock of the Corporation either actually or constructively as determined in 5.02-2 above immediately after the redemption.

(b) Termination of shareholder's interest except for constructive ownership under section 318(a)(1) of the Code.--If it is contended there has been a complete termination of an individual Redeemed Shareholder's interest except for constructive ownership from a family member under section 318(a)(1) and therefore section 302(b)(3) should apply because of section 302(c)(2), furnish the following with respect to each of those Redeemed Shareholders:

(1) Identify such Redeemed Shareholders.

(2) Acquisitions or dispositions of stock of the Corporation within the last 10 years.

(A) Acquisitions by Redeemed Shareholder within the last 10 years.--A statement that none of the stock to be redeemed was acquired by the Redeemed Shareholder, within 10 years preceding the date of redemption, from a person whose stock would be attributed under section 318(a) of the Code to the Redeemed Shareholder at the time of the redemption.

(B) Dispositions by Redeemed Shareholder within the last 10 years.--A statement that at the time of redemption no person whose stock would be attributed to the Redeemed Shareholder under section 318(a) of the Code owns stock of the Corporation which was acquired from the Redeemed Shareholder within 10 years preceding the redemption or if so acquired such stock will be redeemed in the same transaction.

(C) Avoidance of Federal income tax.--If the statements in (A) and (B) immediately above cannot be furnished because of an acquisition or disposition described therein but it is contended that such acquisition or disposition did not have as one of its principal purposes the avoidance of federal income tax, describe such acquisitions or dispositions and furnish whatever facts are deemed relevant to support such a contention. See Sec. 3.01-14 of Rev. Proc. 81-10.

(3) Interest in the Corporation after the redemption.

(A) No interests other than creditor and constructive owner under section 318(a)(1) of the Code.--Furnish a statement that the Redeemed Shareholder, after the redemption, will have no interest in the Corporation, including an interest as officer, director or employee, other than an interest as a creditor as described in section 1.302-4(d) of the regulations and constructive ownership under section 318(a)(1).

(B) Agreement as to future interests.--Submit a statement that the Redeemed Shareholder will execute and file the agreement required in section 302(c)(2)(A)(iii) of the Code with respect to the acquisition of any interests in the Corporation within 10 years from the date of the redemption.

2. Substantially disproportionate redemption.--If it is contended the redemption is substantially disproportionate to one or more of the Redeemed Shareholders, furnish the information required in section 302(b)(2) of the Code with respect to each of those shareholders.

(a) Fifty-percent rule.--State the percent of the total combined voting power of all classes of stock entitled to vote owned actually and constructively by the Redeemed Shareholder as determined in 5.02-4 above.

(b) Eighty-percent rule.--Submit computations to show that the Redeemed Shareholder owns actually and constructively immediately after the redemption (as determined under 5.02-4 above) less than 80 percent of the percentage of the outstanding voting stock owned by him immediately before the redemption and less than 80 percent of the percentage of the outstanding common stock (voting and nonvoting) owned by him immediately before the redemption in accordance with the requirements in section 302(b)(2)(C) of the Code.

3. Redemption not essentially equivalent to a dividend.--If the redemption does not qualify as a partial liquidation under section 346 of the Code or as an exchange under section 303 or under section 302(b)(2) or (3), but it is contended "the redemption is not essentially equivalent to a dividend" within the meaning of section 302(b)(1), submit whatever facts are deemed relevant with respect to each Redeemed Shareholder which have not been furnished above to support such contention. Supply information to show that each Redeemed Shareholder will have a meaningful reduction in proportionate interest in vote, dividend rights, and right to receive assets on liquidation with regard to the Corporation. See section 1.302-2 of the regulations and United States v. Davis, 397 U.S. 301 (1969), Ct. D. 1937, 1970-1 C.B. 62.

4. Other information to determine whether the redemption is an exchange, a dividend, or other ordinary income transaction to the Redeemed Shareholder or any other person.

(a) "Section 306 stock".--If it is contended none of the stock to be redeemed is "section 306 stock" within the meaning of section 306(c) of the Code, submit a statement to that effect. If the stock to be redeemed is preferred stock, furnish the following information:

(1) Issued for cash.--If issued for cash, furnish a statement to that effect and state whether the stock was paid for in full.

(2) Issued upon incorporation.--If the stock was issued upon incorporation in exchange for property, furnish a statement to that effect.

(3) Issued under other circumstances.

(A) When issued.--Give the date or dates on which such stock was issued.

(B) Transaction.--Describe the transaction in which the stock was issued (whether a stock dividend, a reorganization, or other transaction).

(C) Consideration to the Corporation.--Describe the kind of property, if any, the Corporation received in exchange for such stock.

(b) Declared but unpaid dividends.--State whether there are any declared but unpaid dividends on any of the stock to be redeemed.

(c) Financing of redemption.--State the source of the cash or other property to be distributed in the redemption. If cash has been or will be obtained for the redemption by loans, give full particulars as to the parties to, and terms of, the loan agreement.

(d) Stock not to be cancelled, retired, or held as treasury stock.--If a party other than the Corporation will hold the stock to be redeemed, give all facts concerning such an arrangement and the conditions, if any, under which the stock may be returned to the Redeemed Shareholder or any person other than the Corporation, and the relationship under section 318(a) of the Code of that person to be Redeemed Shareholder.

(e) Debt owned by Redeemed Shareholder to the Corporation.--If a Redeemed Shareholder owes any amount to the Corporation, state the circumstances under which the debt arose, the terms of the debt and when and how it will be discharged.

(f) Redemption price and fair market value of the stock.--State whether the redemption price will equal the fair market value of the stock. If it will not, give a complete explanation.

.05 Effect on Redeemed Shareholder where redemption is treated as an exchange.

1. Loss to Redeemed Shareholder.--If it is contended that any Redeemed Shareholder will realize a loss on the redemption of his stock, state reasons to establish why section 267 of the Code will not apply.

2. Installment method.--If a Redeemed Shareholder requests a ruling that the installment method under section 453 of the Code will apply to the redemption, furnish information to support the contention that the requirements in section 453(b) will be met with respect to the Redeemed Shareholder.

.06 Property distributed in redemption of the stock.--Describe in detail the property to be received by each Redeemed Shareholder.

1. United States cash.--Indicate the amount of United States cash (including negotiable instruments and other cash equivalents within the meaning of Rev. Rul. 66-290, 1966-2 C.B. 112) to be distributed to each Redeemed Shareholder in redemption of his stock.

2. Property other than United States cash.

(a) Description.--Describe fully all types and categories of property, tangible and intangible, other than United States cash (including negotiable instruments and other cash equivalents within the meaning of Rev. Rul. 66-290), to be distributed by the Corporation to each Redeemed Shareholder.

(b) Recognition of gain or income to the Corporation. If it is contended that neither gain nor income will be recognized to the Corporation upon the distribution of property, state the reasons and nonapplicability of the exceptions to section 311(a) of the Code, including the following:

(1) Inventory.--A statement whether any inventory will be distributed, and if distributed, whether the Corporation is on the LIFO method of inventory.

(2) Liability in excess of basis.--The amount of liabilities, if any, to be assumed by the Redeemed Shareholder and the amount of liability, if any, to which the property distributed is subject, and the adjusted basis of such property in the hands of the Corporation.

(3) Appreciated property.--If any appreciated property is distributed by the Corporation to a Redeemed Shareholder as part of the redemption, state any exceptions or limitations in section 311(d)(2) of the Code which may be applicable to prevent recognition of gain to the Corporation and give reasons for their applicability.

(4) Unreported and anticipatory assignment of income.--State whether the Corporation will distribute any assets which represent unearned income to the Redeemed Shareholder such as receivables being reported on a cash basis, unfinished construction contracts, commissions due, or other assets resulting in an anticipatory assignment of income.

(5) Other property.--State whether the Corporation will distribute to a Redeemed Shareholder in the redemption any installment obligations (section 453B of the Code), or property described in sections 48, 341(f), 617(d), 1239, 1245(a), 1248, 1250(c), 1251(e), 1252(a), or 1254 (see section 1.311-1(a) of the regulations) or other assets the cost of which has been deducted for federal income tax purposes.

(6) Reserve for bad debts.--If the Corporation will distribute to a Redeemed Shareholder any receivables, state the amount of any reserve for bad debts related to the receivables.

(7) Sale, lease, or other disposition of property.--State whether the Redeemed Shareholder will sell, lease, or otherwise dispose of any property received in redemption of his stock and give full particulars as to the circumstances and agreement with respect to such sale, lease, or other disposition. If property will be leased back to the Corporation, submit a copy of the lease, and state (i) whether the terms of the lease are the result of arm's length negotiation, (ii) whether the payments to be made thereunder will be in an amount equal to the fair rental value of the property, (iii) whether the payments will be dependent on the future earnings of the Corporation, and (iv) whether the payments will be subordinated to the claims of general creditors.

(8) Cross-redemption.--If the Redeemed Shareholder is a corporation and the property to be distributed by the Corporation is stock of the Redeemed Shareholder, submit a statement concerning treatment of such cross-redemption upon each of the corporations together with a statement of relevant authorities to support such treatment.

.07 Assumptions or representations, if applicable.

Sec. 6. Inquiries.

Inquiries in regard to this revenue procedure should refer to its number and should be addressed to Assistant Commissioner (Technical), Attention: T:C:R, Internal Revenue Service, Washington, D.C. 20224.

Sec. 7. Effect On Other Documents

Rev. Proc. 73-35 is superseded. Rev. Proc. 77-41, 1977-2 C.B. 574, which modified Rev. Proc. 73-35, should now be read in conjunction with this revenue procedure.