CHECKLIST FOR RULING REQUESTS RELATING TO STOCK REDEMPTIONS UNDER SECTIONS 302 AND 311 IS REVISED

Rev. Proc. 86-18

         SECTIONS 302 and 311 CHECKLIST QUESTIONAIRE CONTENTS

The purpose of this revenue procedure is to update Rev. Proc. 81-62, 1981-2 C.B. 684, which sets forth in a checklist questionnaire the information that must be included in a request for a ruling under section 302 and 311 of the Internal Revenue Code, relating to distributions in redemption of stock.

SEC. 2. BACKGROUND

The Internal Revenue Service receives many requests for rulings in which the information relating to the proposed transaction is not sufficient to permit a determination to be made. In these cases, it is necessary to obtain additional facts from the taxpayer before the request for a letter ruling can be considered. Obtaining these additional facts is time consuming for both Service personnel and taxpayers and delays issuance of the ruling letter.

This checklist will facilitate the filing and processing of request for rulings under sections 302 and 311 of the Code by showing specific information and representations to be included so that the requests will be as complete as possible when initially filed. Because the information and representations necessary to rule on a particular transaction depend upon all the facts and circumstances, information or representations in addition to those set forth in the revenue procedure may be required.

The authority and general procedures of the National Office of the Internal Revenue Service and of the office of the District Directors of Internal Revenue with respect to the issuance of letter rulings and determination letters are outlined in Rev. Proc. 86-1, 1986-1 I.R.B. 6. See also Rev. Proc. 86-3, 1986-1 I.R.B. 26, relating to areas in which advance rulings generally will not be issued. These revenue procedures, along with the present checklist revenue procedure, are subject to periodic updating by the Service. Therefore, careful attention should be given to ensure usage of the most current revenue procedures.

Careful attention to all requirements of these revenue procedures will aid in the timely processing of letter ruling requests.

SEC. 3. CHANGES

01 Section 1 is modified to indicate that the purpose of the revenue procedure is to update Rev. Proc. 81-62.

02 Section 2 is modified to state that representations are now required, and to update references to revenue procedures cited.

03 Section 4 is modified to update references to Code sections.

04 Section 5 is substantially altered. The taxpayer must now submit standard representations using the precise language specified herein, or submit an explanation why the representations cannot be made in the requested form. Sections 5.021, 5.032, 5.033, 5.041, 5.044, 5.051, and 5.052 are modified accordingly. To properly reflect applicable changes, some citations to Code sections and to revenue rulings and procedures have been added or deleted. Changes include:

1 Section 5.012 now requires taxpayers to submit information concerning any prior ruling requests submitted by the taxpayer (or predecessor) that were withdrawn in which the identical or similar issue was present.

2 Section 5.014 has been deleted.

3 Section 5.02 is modified to update references to revenue procedures cited.

4 Section 5.022(b) is modified to reflect the addition of section 318(a)(5)(E) to the Code.

5 Section 5.023 is amplified to request information concerning the acquisition by the Redeemed Shareholder of the redeemed stock.

6 Section 5.033(a) is modified to request information concerning changes in Corporation's outstanding equity in the past 5 years.

7 Section 5.033(b) is modified to request details of transactions involving any related corporation.

8 Section 5.033(c) is modified to include indirect sales or acquisitions of Corporation's stock by the Redeemed Shareholder.

9 Section 5.041(b)(2)(C) is modified to request supporting relevant authority for taxpayer's contention.

10 Section 5.041(c) is added and requests information and a representation if the Redeemed Shareholder is an entity.

11 Section 5.043 is modified to update reference to the partial liquidation section and to request supporting authority for taxpayer's contention.

12 Section 5.044(a)) is modified to request information if common stock is to be redeemed.

13 Section 5.062(b)(5) is modified to show changes in the recapture provisions.

14 Section 5.07 is modified to request general information, and requires taxpayers to list the specific rulings being requested and the authorities supporting the rulings.

05 Section 6 is modified to substitute Associate Chief Counsel (Technical) for Assistant Commissioner (Technical), and CC:C:R for T:C:R.

06 Section 7 is modified to state that Rev. Proc. 81-62 is superseded.

SEC. 4. TRANSACTIONS TO WHICH SECTION 303 OR 302(b)(4) OF THE CODE APPLIES

01 Section 303. Distribution in redemption to pay death taxes.-- To the extent the distribution is within the terms of section 303 of the Code, section 302(b)(1), (2) or (3) does not apply to the distribution. If the stock redeemed was included in a decedent's gross estate, see section 303 which treats these redemptions under certain circumstances as in full payment in exchange for the stock so redeemed.

02 Section 302(b)(4). Distribution in partial liquidation.--If any part of the distribution will qualify as a partial liquidation under section 302(b)(4) of the Code, state the amount and the reason reasons why it qualified under section 302(b)(4). See Rev. Proc. 81- 42, 1981-2 C.B. 611.

SEC. 5. INFORMATION TO BE INCLUDED IN REQUESTS FOR RULINGS UNDER SECTIONS 302 AND 311 OF THE CODE

Each of the items in this section should be specifically dealt with in the letter ruling request. If an item is not applicable, so state, and briefly explain why. Standard representations are set forth throughout this section and are highlighted by the word "representation" in boldface type. These representations are of equal importance with the other factual information request herein. The representations function to ensure that specific statutory and judicial requirements and administrative ruling guidelines are satisfied. Each representation set forth in this section should be submitted precisely in the language requested. If a representation cannot be submitted as requested, an explanation must be given. Variations of the language of the representations may delay processing the ruling request and will not be accepted unless reasons satisfactory to the Service are submitted. Submission of the information and representations should follow the format of this revenue procedure as closely as possible, with appropriate descriptive headings. Care must be taken to ensure that all the facts relating to the transaction are submitted.

01 Information regarding the corporation that is redeeming its stock (Corporation).

1 Identification.--Name, taxpayer identification number, and place and date of incorporation of Corporation.

2 Jurisdiction.--Identify the District Office that will have audit jurisdiction over the return of Corporation (referred to below as "taxpayer"). State whether, to the best knowledge of the taxpayer and the taxpayer's representatives, 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 meanings of section 1504) and, if so, whether the issue (1) is being examined by a District Director, (2) has been examined by a District Director and (a) the statutory period of limitation either on assessment or for filing a claim for refund or credit of tax has not expired and (b) 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, (4) has been considered by an Appeals Office and (a) the statutory period of limitation either on assessment or for filing a claim for refund or credit of tax has not expired and (b) a closing agreement covering the issue or liability has not been entered into by an Appeals Office, or (5) is pending in litigation in a case involving the taxpayer or a related taxpayer. The request must contain a statement whether, to the best knowledge of the taxpayer and the taxpayer's representatives, the identical or a similar issue has been (i) submitted to the Service, but withdrawn before a ruling was issued, or (ii) ruled on by the Service to the taxpayer or the taxpayer's predecessor and, if so, when and with what result. If, after the request is filed but before a rulings 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 this action. If a return is filed before a ruling is received from the National Office concerning the issue that is the subject of the request for ruling, a copy of the request must be attached to the return. This allerts the District Office and avoids premature District action on the issue.

3 Business.--Provide the following information about Corporation: (i) a brief description of its businesses, (ii) its method of accounting, and (iii) its tax year.

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 Corporation's outstanding stock (throughout this document the work "stock" includes all forms of equity ownership), setting forth the rights and privileges of each class, including voting or nonvoting rights, dividend and liquidation preferences or limitations, and whether classified as common or preferred stock. Also describe all other outstanding interests (bonds, debentures, notes, warrants, options, etc.), and briefly explain why each of these items should or should not be considered a stock interest. If Corporation has no outstanding interests convertible into stock, submit the following REPRESENTATION: There are no outstanding options or warrants to purchase Corporation stock, nor are there any outstanding debentures or other obligations that are convertible into Corporation stock or would be considered Corporation stock. Applying the constructive ownership rules of section 318(a) of the Code, state the relationship between the shareholders and the creditors of Corporation. In addition, describe any new debt or equity that Corporation anticipates issuing.

(b) Distribution of obligations of Corporation.--If applicable, submit the following REPRESENTATION: No notes or other obligations of Corporation will be distributed to a redeemed shareholder. Alternatively, if notes or other obligations of 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 that set forth its terms and limitations.

(2) Period of payments.--Give the beginning and ending payment dates. Submit the following REPRESENTATION: In no event will the last payment on any note or other obligation be made more than 15 years after the date of issuance of the note or other obligation. See section 4.0112 of Rev. Proc. 86-3.

(3) Payment of fixed amount.--State whether the amount to be paid, including interest, is a fixed amount payable at a fixed time, and whether the amount or the time of payment is subject to any change or adjustment. Submit the following REPRESENTATION: None of the consideration from Corporation, including interest, consists entirely or partly of corporation's promise to pay an amount that is based on, or contingent on, future earnings of Corporation, an amount that is contingent on working capital being maintained at a certain level, or any other similar contingency. See section 3.0117 of Rev. Proc. 86-3. Alternatively, furnish any payments' terms and reasons why the right to the payments should not be considered an equity interest in Corporation.

(4) Financial statements.--Submit profit and loss statements and balance sheets for the latest 3 years.

(5) Subordination.--Submit the following REPRESENTATION: Any note or other obligation to be issued to a redeemed shareholder will not be subordinated to the claims of general creditors of Corporation.

(6) Default.--Submit the following REPRESENTATION: In the event of default on any note or other obligation, no shares of stock will revert to or be received by a redeemed shareholder nor will any redeemed shareholder be permitted to purchase the stock at public or private sale. See Section 3.0116 of Rev. Proc. 86-3.

2 Ownership of stock before the redemption.

(a) Shares owned directly.--State the total number of shares outstanding for each class of stock in Corporation immediately before the redemption. Also state the number of shares and percentage of each class of stock owned directly be each shareholder immediately before the redemption. However, if there are more than 25 shareholders, the statement in the preceding sentence may be limited to Redeemed Shareholders and those shareholders whose stock is attributed to them under section 318(a) of the Code.

(b) Shares constructively owned.--State the number of shares and percentage of each Redeemed Shareholder, and the relationship under section 318(a) of the Code of any person or entity whose stock is attributed to a Redeemed Shareholder. In determining stock constructively owned by each Redeemed Shareholder under section 318(a), ownership may be attributed any number of times from on 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 "sidewise" attribution to (under section 318(a)(3)) and from (under section 318(a)(2), a partnership, estate, trust, or corporation.

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

In addition, observe that pursuant to section 318(a)(5)(E) of the Code, an S corporation is treated as a partnership and each of its shareholders as partners of the partnership for purposes of section 318(a). But note the limitation for purposes of constructive ownership provided by section 318(a)(5)(E).

(1) Section 318(a)(1) of the Code: family attribution.--If the Redeemed Shareholder is an individual, indicate the number of shares and percentage of each class of stock of Corporation owned actually and constructively under section 318(a) by members of the Redeemed Shareholder's family 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 and percentage of each class of stock of 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 entitles.

(3) Section 318(a)(3) of the Code: attribution to a partnership, estate, trust, or corporation.--Indicate the number of shares and percentage of each class of stock of Corporation owned actually and constructively under section 318(a) as follows: (i) by any of the partners if the Redeemed shareholder is a partnership; or (ii) by any of the beneficiaries if the Redeemed Shareholder is a trust or estate; or (iii) by any of the shareholders owning actually or constructively, under section 318(a), 50 percent or more in value 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 Corporation.--Identify all holders of any rights or options (including those in the form of convertible debentures and stock rights or warrants) to acquire stock of Corporation and the relationship, direct or indirect under section 318(a), of the option holders to each of the Redeemed Shareholders.

(c) Percent of stock owned.--Indicate the total percentage of each class of stock of Corporation owned actually and constructively, as determined in section 5.022(a) and (b) above, by each shareholder of 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 Corporation listed in section 5.022(a) above. Unless the stock is traded on an established securities market, also state when, from whom, and for what consideration each Redeemed Shareholder received the equity interest being redeemed.

4 Ownership of stock after the redemption.--Indicate the number of shares of each class of stock of Corporation owned actually and constructively by each shareholder, the total outstanding, 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 section 5.022 above.

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

1 Other relationships between Corporation and any Redeemed Shareholder.--With regard to each Redeemed Shareholder, state whether the shareholder was, or will be, an employee of, an officer of, or in any way related to, Corporation. Describe fully all business and debtor-creditor relationships between each Redeemed Shareholder and Corporation. Describe all direct and indirect payments by Corporation to, or for the benefit of, each Redeemed Shareholder. (See e.g., Rev. Rul. 77-467, 1977-2 C.B. 92 and section 3.0118 of Rev. Proc. 86-3.) Give details of any agreements between a Redeemed Shareholder and Corporation, such as an employment contract, convenant not to compete, insurance, pensions, deferred compensation, or other benefits, and state whether the agreements, payments, or benefits had an affect 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 Corporation, and the consideration to be received in exchange therefor. State whether any part of the consideration from Corporation will be received by a Redeemed Shareholder, directly or indirectly, as a creditor, employee, or in some capacity other than as a Redeemed Shareholder. Describe whether the Redeemed Shareholder conducts or will conduct any business with, or leases or will lease any property to, Corporation.

2 Agreements between shareholders.--Submit the following REPRESENTATION: No shareholder of Corporation has been or will be obligated to purchase any of the stock to be redeemed. Alternatively, if there are, or within the 3-year period prior to the transaction have been, any agreements between a Redeemed Shareholder and other shareholders as to the acquisition or disposition of any equity interest, such as buy-sell agreements or option, describe the agreements or options in full. Submit copies of all pertinent agreements. See Rev. Rul. 69-608, 1969-2 C.B. 43.

3 Other transactions.--Submit the following REPRESENTATION: The redemption described in this ruling requests is an isolated transaction and is not related to any other past or future transaction. Alternatively, state whether there have been, or will be, any related transactions, and, if so, briefly describe these other transactions and fully explain their relationship to, and impact on, the present transaction. See section 9.06 of Rev. Proc. 86-1.

(a) Transactions involving Corporation.--If there have been no changes in Corporation's outstanding equity in the past 5 years, submit the following REPRESENTATION; There have been no redemptions, issuances, or exchanges by Corporation of its stock in the past 5 years. Alternatively, describe all changes in Corporation's outstanding equity during this period, including every redemption, issuance, or exchange of stock by Corporation. State whether any of the shareholders involved in any of these prior transactions are Redeemed Shareholders, or related within the meaning of section 318 of the Code to a Redeemed Shareholder, in the present transaction.

If no future transactions are planned or intended, submit the following REPRESENTATION: Corporation has no plan or intention to issue, redeem, or exchange additional share of its stock. Alternatively, if any issuances, redemptions, or exchanges are planned, describe the transaction, the number and type of shares, and the consideration to be paid or received in exchange for the stock, and state whether any of the shareholders involved in any future transaction are Redeemed Shareholders, or related within the meaning of section 318 of the Code to a Redeemed Shareholder, in the present transaction.

(b) Transactions involving any related corporation.--State whether there were, or will be, any distributions, redemptions, or issuances of stock of any related corporation, and if so, briefly describe the transactions and fully explain their relationship to the present transaction.

(c) Transactions involving any Redeemed Shareholder.--State whether any Redeemed Shareholder or a related party has sold or acquired, or intends to sell or acquire, any stock in Corporation or any related corporation either directly or constructively within five years of the redemption. If so, state the number of shares of each class, identify the parties to the transaction, the relationship of the 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 the stock has been considered consummated in computing the ownership of stock before and after the redemption in section 5.022 and 4 above. State whether Corporation will be liable, directly or indirectly, for any part of the buyer's obligation in the purchase of stock. See Rev. Rul. 69-608, supra.

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

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

1 Termination of shareholder's interest.

(a) Complete termination of shareholder's stock interest.-- Submit the following REPRESENTATION: None of the redeemed shareholders are related, within the meaning of section 318 of the Code, to any remaining shareholders of Corporation.

(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 a Redeemed Shareholder's interest except for constructive ownership from a family member under section 318(a)(1) so that section 302(b)(3) should apply pursuant to the application of section 302(c)(2), furnish the following with respect to the Redeemed Shareholders:

(1) Identity of the Redeemed Shareholders.

(2) Acquisitions or dispositions of stock of Corporation within the last 10 years by the Redeemed Shareholders. Do not include a change in interest resulting from partition of community property. See Rev. Rul. 82-129, 1982-2 C.B. 76.

(A) Acquisitions by Redeemed Shareholders within the last 10 years.--Submit the following REPRESENTATION: None of the stock to be redeemed was acquired by the redeemed shareholder within the 10-year period preceding the redemption from a person whose stock would be attributed under section 318(a) of the Code to the redeemed shareholder at the time of redemption. (Alternatively, see (C) below.)

(B) Dispositions by Redeemed Shareholder within the last 10 years.--Submit the following REPRESENTATION; No person whose stock would be attributed to the redeemed shareholder under section 318(a) of the Code will own stock of Corporation after the redemption if the stock was acquired by that person from the redeemed shareholder within 10 years preceding the redemption. (Alternatively, see (C) below.)

(C) Avoidance of federal income tax.--If the representation in either (A) or (B) immediately above cannot be furnished because of an acquisition or disposition described therein, but it is contended that the acquisition or disposition did not have as one of its principal purposes the avoidance of federal income tax, give a full description and furnish an analysis of both the facts and supporting relevant authority for the contention. See section 3.0119 of Rev. Proc. 86-3.

(3) Interest in Corporation after the redemption.

(A) No interests other than creditor and constructive owner under section 318(a)(1) of the Code.--Describe whether Corporation will provide any compensation or economic benefit to any Redeemed Shareholder (regardless of whether the compensation or benefit is related to prior services) including termination bonuses, payments under covenants not to complete, free insurance, and future employment of any type whether directly as an officer or employee or indirectly as an independent contractor or consultant. Submit the following REPRESENTATION: After the redemption, no redeemed shareholder will have any interest in 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 Income Tax Regulations, and constructive ownership under section 318(a)(1) of the Code). See Rev. Ruls. 84-135, 1984-2 C.B. 80, 81-233, 1981-2 C.B. 83, and 71-426, 1971-2 C.B. 173.

(B) Agreement as to future interests.--When attribution under section 318(a)(1) of the Code is to be waived pursuant to section 302(c)(2)(A), submit the following REPRESENTATION: Each redeemed shareholder will execute and file the agreement required by section 302(c)(2)(A)(iii) of the Code with respect to the acquisition of any interest in Corporation within 10 years from the date of the redemption.

(C) Termination of entity-shareholder's interest except for constructive ownership under section 318(a)(1) of the Code.--If a partnership, estate, trust, or corporation is a Redeemed Shareholder and stock is attributed to it under section 318(a)(3) of the Code from a "related person" (defined in section 302(c)(2)(C)(ii)), submit: (i) the name and relationship to the entity of each related person; (ii) the representations in section 5.041(b)(2)(A) for each Redeemed Shareholder and in section 5.041(b)(2)(B) for each Redeemed Shareholder and each related person (or the information in section 5.041(b)(2)(C)); (iii) the information and representations required by section 5.041(b)(3)(A) and (B) for each Redeemed Shareholder and each related person; and (iv) the following REPRESENTATION: The Redeemed Shareholder and each related person will agree to be jointly and severally liable for any deficiency (including interest and additional tax) resulting from an acquisition of an interest in 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 each Redeemed Shareholder (as determined in section 5.024 above) immediately after the redemption.

(b) Eighty-percent rule.--Submit computations to show that each Redeemed Shareholder owns actually and constructively immediately after the redemption (as determined under section 5.024 above) less than 80 percent of the percentage of the outstanding common stock (voting and nonvoting) owned immediately before the redemption, in accordance with the requirements in section 302(b)(2)(C) of the Code. If a Redeemed Shareholder holds no common stock, either directly or constructively, no computation for common stock is required (see Rev. Rul. 81-41, 1981-1 C.B. 121).

3 Redemption not essentially equivalent to a dividend.--If the redemption does not qualify as a partial liquidation under section 301(b)(4) of the Code, as an exchange under section 303, or under section 302(b)(2) or (3), and it is contended "the redemption is not essentially equivalent to a dividend" within the meaning of section 302(b)(1), submit whatever facts and analysis of supporting authority are relevant with respect to each Redeemed Shareholder (which have not been furnished above) to support this 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 Corporation. See United States v. Davis, 397 U.S. 301 (1969), Ct. D. 1937, 1970-1 C.B. 62, section 1.302-2 of the regulations, and Rev. Rul. 81-289, 1981-2 C.B. 82.

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 that none of the stock to be redeemed is "section 306 stock" within the meaning of section 306(c) of the Code, submit the following REPRESENTATION: None of the stock to be redeemed is "section 306 stock" within the meaning of section 306(c) of the Code. If the stock to be redeemed is common stock, state whether it was received in exchange for preferred stock. 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. (See section 306(c)(3) and (4) of the Code.)

(3) Issued under other circumstances.

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

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

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

(b) Declared but unpaid dividends.--Submit the following REPRESENTATION: There are no declared but unpaid dividends, or funds set apart for dividends, or any of the stock to be redeemed. (See Rev. Rul. 75-320, 1975-2 C.b. 105, and Rev. Rul. 69-130, 1969-1 C.B. 93.)

(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 borrowed for the redemption, give full redemption, 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 Corporation will hold the stock to be redeemed, give all facts concerning the arrangement and the conditions, if any, under which the stock may be returned to the Redeemed Shareholder or any person other than Corporation, and the relationship under section 318(a) of the Code of that person to the Redeemed Shareholder.

(e) Debt owed by Redeemed Shareholder to Corporation.--If a Redeemed Shareholder owes any amount to 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.--Submit the following REPRESENTATION: At the time of the exchange, the fair market value of the consideration to be received by the redeemed shareholder will be approximately equal to the fair market value of Corporation's stock to be exchanged therefor. Alternatively, if it will not be approximately equal, give a complete explanation, including the fair market value of both the stock redeemed and the assets distributed.

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

1 Loss to Redeemed Shareholder.--Submit the following REPRESENTATION: The price to be paid for Corporation's stock to be redeemed will not result in a loss with respect to those shares of stock. Alternatively, if any Redeemed Shareholder will realize a loss on the redemption, 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. Further, submit the following REPRESENTATION: The redemption of Corporation stock (i) is not a disposition of personal property on the installment plan by a person who regularly sells or otherwise disposes of personal property on the installment plan and (ii) is not a disposition of personal property of a kind required to be included in the inventory of any redeemed shareholder at the close of the taxable year. Any note or other obligation to be issued to a redeemed shareholder will not be issued in any form designed to render it readily tradable on an established securities market. See section 453(b), (f)(2), and (f)(5) of the Code.

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 cash equivalents within the meaning of Rev. Rul. 66-290, 1966-2 C.B. 112) to be distributed to each Redeemed Shareholder.

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 cash equivalents within the meaning of Rev. Rul. 66-290), to be distributed by Corporation to each Redeemed Shareholder.

(b) Recognition of gain or income to Corporation.--In order to determine whether gain or income will be recognized to Corporation upon the distribution of property, provide the following:

(1) Inventory (section 311(b)).--A statement whether any inventory will be distributed and, if distributed, whether Corporation is on the LIFO method of inventory.

(2) Liability in excess of basis (section 311(c)).--A statement as to the amount of any liabilities to be assumed by a Redeemed Shareholder, the amount of any liability to which the property distributed is subject, and the adjusted basis in the hands of Corporation of all property distributed.

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

(4) Unreported and anticipatory assignment of income.--State whether Corporation will distribute to a Redeemed Shareholder any assets which represent earned but unreported income 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) Installment obligations and recapture provisions.--State whether Corporation will distribute to a Redeemed Shareholder in the redemption (i) any installment obligations (section 453B of the Code), (ii) any property described in the recapture provisions of the Code including, but not limited to, sections 47, 291(a), 341(f), 617(d), 897(d), 904(f), 1245(a), 1248(f), 1250(c), 1252(a), 1254, or 1255, (iii) any property for which the taxpayer obtained a deduction (See Hillsboro National Bank v. Commissioner, 460 U.S. 370 (1983); Rev. Rul. 74-396, 1974-2 C.B. 106; Rev. rul. 61-214, 1961-2 C.B. 60), or (iv) any property described in sections 1256 or 1276.

(6) Reserve for bad debts.--A statement whether Corporation will distribute to a Redeemed Shareholder any receivables. If so, 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 the redemption, and give full particulars as to the circumstances and agreement with respect to the sale, lease, or other disposition. If property will be leased back to Corporation, submit a copy of the lease, and state whether: (i) the terms of the lease are the result of arm's length negotiation; (ii) the payments to be made thereunder will be in an amount equal to the fair rental value of the property; (iii)the payments will be dependent on the future earnings of Corporation; and (iv) the payments will be subordinated to the claims of general creditors. See Rev. Rul. 77- 467, 1977-2 C.B. 92.

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

07 General

1 Additional statements.--See Rev. Proc. 86-1 for additional information and statements that must be submitted with all ruling requests, including statements required under sections 9.02 and 9.09 (relating to instructions to taxpayers).

2 Requested rulings.--List the rulings being requested in the exact wording desired, and provide statutory, regulatory, or other authority for their issuance.

3 Taxpayer's memorandum.--Submit the information required by section 9.08 of Rev. Proc. 86-1 (relating to relevant authorities regarding the tax results of the transaction).

SEC. 6 INQUIRIES

Inquiries in regard to this revenue procedure should refer to its number and should be addressed to the Associate Chief Counsel (Technical), Attention: CC:C:R, Internal Revenue Service, Washington, D.C. 20224.