Rev. Rul. 81-233

ISSUE

Are the requirements of section 302(c)(2)(A)(ii) of the Internal Revenue Code violated when the former shareholder whose stock was redeemed is appointed custodian of stock of the distributing corporation under the Uniform Gifts to Minors Act within the 10-year period subsequent to a redemption distribution?

FACTS

A domestic corporation, X, had outstanding voting stock all of which was owned by A, B, and C. A and B were husband and wife and C was their child. In 1978 X redeemed all of its stock held by C. C filed the agreement specified in section 302(c)(2)(A)(iii) of the Code, and reported the distribution received from X as being in full payment in exchange for the X stock, pursuant to section 302(a), by reason of the application of section 302(b)(3).

In 1980, A and B made a gift of X stock, pursuant to the Uniform Gifts to Minors Act, to C's minor child, naming C as the custodian of the X stock.

LAW AND ANALYSIS

Since the provisions of section 318(a)(1) of the Code (relating to constructive ownership of stock owned by members of a family) are generally applicable in determining the ownership of stock for purposes of section 302 of the Code, C would normally be considered to own all of the stock owned by A and B. However, section 302(c)(2) provides that section 318(a)(1) will not apply to a distribution described in section 302(b)(3) if, among other requirements, within 10 years from the date of the distribution the distributee does not acquire an interest in the corporation (including an interest as officer, director or employee), other than an interest as a creditor. Section 302(c)(2)(A)(ii).

Therefore, in order to qualify the redemption as a complete redemption of all of the stock of the corporation owned by C under section 302(b)(3) of the Code, and thereby have the redemption treated as a distribution in full payment in exchange for stock under section 302(a). C must acquire no interest in the corporation within the meaning of section 302(c)(2)(A)(ii) within 10 years from the date of the distribution.

In Rev. Rul. 71-426, 1971-2 C.B. 173, there was a distribution in redemption of stock where the distributee continued in a position as a voting trustee of a trust that held the remaining stock of the distributing corporation for the benefit of the distributee's children. In that revenue ruling it was held that, by remaining as a voting trustee, the distributee continued to have an interest in the distributing corporation by having the right to vote the stock that was held by the trust.

Similarly, under the Uniform Gifts to Minors Act the person having custody of stock held pursuant thereto is entitled to vote the stock. Therefore, a person having custody of stock under such Act will be viewed as having acquired an interest in that corporation.

HOLDING

The requirements of section 302(c)(2)(A)(ii) of the Code are violated when within the 10-year period subsequent to a redemption distribution the distributee is appointed as a custodian of stock of the distributing corporation under the Uniform Gifts to Minors Act. Under the facts here, since C will be considered under section 318(a)(1) to own the stock owned by A and B and, thus, the owner of 100 percent of the X stock both before and after the redemption, the distribution will be treated pursuant to section 302(d) as a distribution of property to which section 301 applies.