[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1041-2]

[Page 165-167]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1041-2  Redemptions of stock.

    (a) In general--(1) Redemptions of stock not resulting in 
constructive distributions. Notwithstanding Q&A-9 of Sec. 1.1041-1T(c), 
if a corporation redeems stock owned by a spouse or former spouse 
(transferor spouse), and the transferor spouse's receipt of property in 
respect of such redeemed stock is not treated, under applicable tax law, 
as resulting in a constructive distribution to the other spouse or 
former spouse (nontransferor spouse), then the form of the stock 
redemption shall be respected for Federal income tax purposes. 
Therefore, the transferor spouse will be treated as having received a 
distribution from the corporation in redemption of stock.
    (2) Redemptions of stock resulting in constructive distributions. 
Notwithstanding Q&A-9 of Sec. 1.1041-1T(c), if a corporation redeems 
stock owned by a transferor spouse, and the transferor spouse's receipt 
of property in respect of such redeemed stock is treated, under 
applicable tax law, as resulting in a constructive distribution to the 
nontransferor spouse, then the redeemed stock shall be deemed first to 
be transferred by the transferor spouse to the nontransferor spouse and 
then to be transferred by the nontransferor spouse to the redeeming 
corporation. Any property actually received by the transferor spouse 
from the redeeming corporation in respect of the redeemed

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stock shall be deemed first to be transferred by the corporation to the 
nontransferor spouse in redemption of such spouse's stock and then to be 
transferred by the nontransferor spouse to the transferor spouse.
    (b) Tax consequences--(1) Transfers described in paragraph (a)(1) of 
this section. Section 1041 will not apply to any of the transfers 
described in paragraph (a)(1) of this section. See section 302 for rules 
relating to the tax consequences of certain redemptions; redemptions 
characterized as distributions under section 302(d) will be subject to 
section 301 if received from a Subchapter C corporation or section 1368 
if received from a Subchapter S corporation.
    (2) Transfers described in paragraph (a)(2) of this section. The tax 
consequences of each deemed transfer described in paragraph (a)(2) of 
this section are determined under applicable provisions of the Internal 
Revenue Code as if the spouses had actually made such transfers. 
Accordingly, section 1041 applies to any deemed transfer of the stock 
and redemption proceeds between the transferor spouse and the 
nontransferor spouse, provided the requirements of section 1041 are 
otherwise satisfied with respect to such deemed transfer. Section 1041, 
however, will not apply to any deemed transfer of stock by the 
nontransferor spouse to the redeeming corporation in exchange for the 
redemption proceeds. See section 302 for rules relating to the tax 
consequences of certain redemptions; redemptions characterized as 
distributions under section 302(d) will be subject to section 301 if 
received from a Subchapter C corporation or section 1368 if received 
from a Subchapter S corporation.
    (c) Special rules in case of agreements between spouses or former 
spouses-- (1) Transferor spouse taxable. Notwithstanding applicable tax 
law, a transferor spouse's receipt of property in respect of the 
redeemed stock shall be treated as a distribution to the transferor 
spouse in redemption of such stock for purposes of paragraph (a)(1) of 
this section, and shall not be treated as resulting in a constructive 
distribution to the nontransferor spouse for purposes of paragraph 
(a)(2) of this section, if a divorce or separation instrument, or a 
valid written agreement between the transferor spouse and the 
nontransferor spouse, expressly provides that--
    (i) Both spouses or former spouses intend for the redemption to be 
treated, for Federal income tax purposes, as a redemption distribution 
to the transferor spouse; and
    (ii) Such instrument or agreement supersedes any other instrument or 
agreement concerning the purchase, sale, redemption, or other 
disposition of the stock that is the subject of the redemption.
    (2) Nontransferor spouse taxable. Notwithstanding applicable tax 
law, a transferor spouse's receipt of property in respect of the 
redeemed stock shall be treated as resulting in a constructive 
distribution to the nontransferor spouse for purposes of paragraph 
(a)(2) of this section, and shall not be treated as a distribution to 
the transferor spouse in redemption of such stock for purposes of 
paragraph (a)(1) of this section, if a divorce or separation instrument, 
or a valid written agreement between the transferor spouse and the 
nontransferor spouse, expressly provides that--
    (i) Both spouses or former spouses intend for the redemption to be 
treated, for Federal income tax purposes, as resulting in a constructive 
distribution to the nontransferor spouse; and
    (ii) Such instrument or agreement supersedes any other instrument or 
agreement concerning the purchase, sale, redemption, or other 
disposition of the stock that is the subject of the redemption.
    (3) Execution of agreements. For purposes of this paragraph (c), a 
divorce or separation instrument must be effective, or a valid written 
agreement must be executed by both spouses or former spouses, prior to 
the date on which the transferor spouse (in the case of paragraph (c)(1) 
of this section) or the nontransferor spouse (in the case of paragraph 
(c)(2) of this section) files such spouse's first timely filed Federal 
income tax return for the year that includes the date of the stock 
redemption, but no later than the date such return is due (including 
extensions).

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    (d) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. Corporation X has 100 shares outstanding. A and B each 
own 50 shares. A and B divorce. The divorce instrument requires B to 
purchase A's shares, and A to sell A's shares to B, in exchange for 
$100x. Corporation X redeems A's shares for $100x. Assume that, under 
applicable tax law, B has a primary and unconditional obligation to 
purchase A's stock, and therefore the stock redemption results in a 
constructive distribution to B. Also assume that the special rule of 
paragraph (c)(1) of this section does not apply. Accordingly, under 
paragraphs (a)(2) and (b)(2) of this section, A shall be treated as 
transferring A's stock of Corporation X to B in a transfer to which 
section 1041 applies (assuming the requirements of section 1041 are 
otherwise satisfied), B shall be treated as transferring the Corporation 
X stock B is deemed to have received from A to Corporation X in exchange 
for $100x in an exchange to which section 1041 does not apply and 
sections 302(d) and 301 apply, and B shall be treated as transferring 
the $100x to A in a transfer to which section 1041 applies.
    Example 2. Assume the same facts as Example 1, except that the 
divorce instrument provides as follows: ``A and B agree that the 
redemption will be treated for Federal income tax purposes as a 
redemption distribution to A.'' The divorce instrument further provides 
that it ``supersedes all other instruments or agreements concerning the 
purchase, sale, redemption, or other disposition of the stock that is 
the subject of the redemption.'' By virtue of the special rule of 
paragraph (c)(1) of this section and under paragraphs (a)(1) and (b)(1) 
of this section, the tax consequences of the redemption shall be 
determined in accordance with its form as a redemption of A's shares by 
Corporation X and shall not be treated as resulting in a constructive 
distribution to B. See section 302.
    Example 3. Assume the same facts as Example 1, except that the 
divorce instrument requires A to sell A's shares to Corporation X in 
exchange for a note. B guarantees Corporation X's payment of the note. 
Assume that, under applicable tax law, B does not have a primary and 
unconditional obligation to purchase A's stock, and therefore the stock 
redemption does not result in a constructive distribution to B. Also 
assume that the special rule of paragraph (c)(2) of this section does 
not apply. Accordingly, under paragraphs (a)(1) and (b)(1) of this 
section, the tax consequences of the redemption shall be determined in 
accordance with its form as a redemption of A's shares by Corporation X. 
See section 302.
    Example 4. Assume the same facts as Example 3, except that the 
divorce instrument provides as follows: ``A and B agree the redemption 
shall be treated, for Federal income tax purposes, as resulting in a 
constructive distribution to B.'' The divorce instrument further 
provides that it ``supersedes any other instrument or agreement 
concerning the purchase, sale, redemption, or other disposition of the 
stock that is the subject of the redemption.'' By virtue of the special 
rule of paragraph (c)(2) of this section, the redemption is treated as 
resulting in a constructive distribution to B for purposes of paragraph 
(a)(2) of this section. Accordingly, under paragraphs (a)(2) and (b)(2) 
of this section, A shall be treated as transferring A's stock of 
Corporation X to B in a transfer to which section 1041 applies (assuming 
the requirements of section 1041 are otherwise satisfied), B shall be 
treated as transferring the Corporation X stock B is deemed to have 
received from A to Corporation X in exchange for a note in an exchange 
to which section 1041 does not apply and sections 302(d) and 301 apply, 
and B shall be treated as transferring the note to A in a transfer to 
which section 1041 applies.

    (e) Effective date. Except as otherwise provided in this paragraph, 
this section is applicable to redemptions of stock on or after January 
13, 2003, except for redemptions of stock that are pursuant to 
instruments in effect before January 13, 2003. For redemptions of stock 
before January 13, 2003 and redemptions of stock that are pursuant to 
instruments in effect before January 13, 2003, see Sec. 1.1041-1T(c), 
A-9. However, these regulations will be applicable to redemptions 
described in the preceding sentence of this paragraph (e) if the spouses 
or former spouses execute a written agreement on or after August 3, 2001 
that satisfies the requirements of one of the special rules in paragraph 
(c) of this section with respect to such redemption. A divorce or 
separation instrument or valid written agreement executed on or after 
August 3, 2001, and before May 13, 2003 that meets the requirements of 
the special rule in Regulations Project REG-107151-00 published in 2001-
2 C.B. 370 (see Sec. 601.601(d)(2) of this chapter) will be treated as 
also meeting the requirements of the special rule in paragraph (c)(2) of 
this section.

[T.D. 9035, 68 FR 1536, Jan. 13, 2003]

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