[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.302-4]

[Page 16-17]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.302-4  Termination of shareholder's interest.

    Section 302(b)(3) provides that a distribution in redemption of all 
of the stock of the corporation owned by a shareholder shall be treated 
as a distribution in part or full payment in exchange for the stock of 
such shareholder. In determining whether all of the stock of the 
shareholder has been redeemed, the general rule of section 302(c)(1) 
requires that the rules of constructive ownership provided in section 
318(a) shall apply. Section 302(c)(2), however, provides that section 
318(a)(1) (relating to constructive ownership of stock owned by members 
of a family) shall not apply where the specific requirements of section 
302(c)(2) are met. The following rules shall be applicable in 
determining whether the specific requirements of section 302(c)(2) are 
met:
    (a)(1) The agreement specified in section 302(c)(2)(A)(iii) shall be 
in the form of a separate statement in duplicate signed by the 
distributee and attached to the first return filed by the distributee 
for the taxable year in which the distribution described in section 
302(b)(3) occurs. The agreement shall recite that the distributee has 
not acquired, other than by bequest or inheritance, any interest in the 
corporation (as described in section 302(c)(2)(A)(i)) since the 
distribution and that the distributee agrees to notify the district 
director for the internal revenue district in which the distributee 
resides of any acquisition, other than by bequest or inheritance, of 
such an interest in the corporation within 30 days after the 
acquisition, if the acquisition occurs within 10 years from the date of 
the distribution.
    (2) If the distributee fails to file the agreement specified in 
section 302(c)(2)(A)(iii) at the time provided in paragraph (a)(1) of 
this section, then the district director for the internal revenue 
district in which the distributee resided at the time of filing the 
first return for the taxable year in which the distribution occurred 
shall grant a reasonable extension of time for filing such agreement, 
provided (i) it is established to the satisfaction of the district 
director that there was reasonable cause for failure to file the 
agreement within the prescribed time and (ii) a request for such 
extension is filed within such time as the district director considers 
reasonable under the circumstances.
    (b) The distributee who files an agreement under section 
302(c)(2)(A)(iii) shall retain copies of income tax returns and any 
other records indicating fully the amount of tax which would have been 
payable had the redemption been treated as a distribution subject to 
section 301.
    (c) If stock of a parent corporation is redeemed, section 
302(c)(2)(A), relating to acquisition of an interest in the corporation 
within 10 years after termination shall be applied with reference to an 
interest both in the parent corporation and any subsidiary of such 
parent corporation. If stock of a parent corporation is sold to a 
subsidiary in a transaction described in section 304, section 
302(c)(2)(A) shall be applicable to the acquisition of an interest in 
such subsidiary corporation or in the parent corporation. If stock of a 
subsidiary corporation is redeemed, section 302(c)(2)(A) shall be 
applied with reference to an interest both in such subsidiary 
corporation and its parent. Section 302(c)(2)(A) shall also be applied 
with respect to an interest in a

[[Page 17]]

corporation which is a successor corporation to the corporation the 
interest in which has been terminated.
    (d) For the purpose of section 302(c)(2)(A)(i), a person will be 
considered to be a creditor only if the rights of such person with 
respect to the corporation are not greater or broader in scope than 
necessary for the enforcement of his claim. Such claim must not in any 
sense be proprietary and must not be subordinate to the claims of 
general creditors. An obligation in the form of a debt may thus 
constitute a proprietary interest. For example, if under the terms of 
the instrument the corporation may discharge the principal amount of its 
obligation to a person by payments, the amount or certainty of which are 
dependent upon the earnings of the corporation, such a person is not a 
creditor of the corporation. Furthermore, if under the terms of the 
instrument the rate of purported interest is dependent upon earnings, 
the holder of such instrument may not, in some cases, be a creditor.
    (e) In the case of a distributee to whom section 302(b)(3) is 
applicable, who is a creditor after such transaction, the acquisition of 
the assets of the corporation in the enforcement of the rights of such 
creditor shall not be considered an acquisition of an interest in the 
corporation for purposes of section 302(c)(2) unless stock of the 
corporation, its parent corporation, or, in the case of a redemption of 
stock of a parent corporation, of a subsidiary of such corporation is 
acquired.
    (f) In determining whether an entire interest in the corporation has 
been terminated under section 302(b)(3), under all circumstances 
paragraphs (2), (3), (4), and (5) of section 318(a) (relating to 
constructive ownership of stock) shall be applicable.
    (g) Section 302(c)(2)(B) provides that section 302(c)(2)(A) shall 
not apply--
    (1) If any portion of the stock redeemed was acquired directly or 
indirectly within the 10-year period ending on the date of the 
distribution by the distributee from a person, the ownership of whose 
stock would (at the time of distribution) be attributable to the 
distributee under section 318(a), or
    (2) If any person owns (at the time of the distribution) stock, the 
ownership of which is attributable to the distributee under section 
318(a), such person acquired any stock in the corporation directly or 
indirectly from the distributee within the 10-year period ending on the 
date of the distribution, and such stock so acquired from the 
distributee is not redeemed in the same transaction,unless the 
acquisition (described in subparagraph (1) of this paragraph) or the 
disposition by the distributee (described in subparagraph (2) of this 
paragraph) did not have as one of its principal purposes the avoidance 
of Federal income tax. A transfer of stock by the transferor, within the 
10-year period ending on the date of the distribution, to a person whose 
stock would be attributable to the transferor shall not be deemed to 
have as one of its principal purposes the avoidance of Federal income 
tax merely because the transferee is in a lower income tax bracket than 
the transferor.

(Sec. 302(c)(2)(A)(iii) (68A Stat. 87; 26 U.S.C. 302 (c)(2)(A)(iii)))

[T.D. 7535, 43 FR 10686, Mar. 15, 1978]