[Federal Register Volume 71, Number 75 (Wednesday, April 19, 2006)]
[Proposed Rules]
[Pages 20044-20045]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-5811]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-150313-01]
RIN 1545-BA80


Withdrawal of Proposed Regulations Relating to Redemptions 
Taxable as Dividends

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document withdraws a notice of proposed rulemaking 
relating to redemptions of stock in which the redemption proceeds are 
treated as a dividend distribution. The proposed regulations were 
published on October 18, 2002 (67 FR 64331). After consideration of the 
comments received, the IRS and Treasury Department have decided to 
withdraw the proposed regulations.

DATES: These proposed regulations are withdrawn April 19, 2006.

FOR FURTHER INFORMATION CONTACT: Theresa M. Kolish (202) 622-7750 (not 
a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

    On October 18, 2002, the IRS and Treasury Department issued 
proposed regulations providing guidance under sections 302 and 304 of 
the Internal Revenue Code regarding the treatment of the basis of stock 
redeemed or treated as redeemed. Section 302 provides that a 
corporation's redemption of its stock is treated as a distribution in 
part or full payment in exchange for the stock if the redemption 
satisfies certain criteria. If the redemption does not satisfy any of 
these criteria, the redemption is treated as a distribution to which 
section 301 applies. Under section 301(c)(1), a distribution is first 
treated as a dividend to the extent of earnings and profits. The 
remaining portion of a distribution, if any, is applied against and 
reduces basis of stock, and finally is treated as gain from the sale or 
exchange of property pursuant to section 301(c)(2) and (3).
    Section 304(a)(1) treats the acquisition of stock by a corporation 
from one or more persons that are in control of both the acquiring and 
issuing corporation as if the property received for the acquired stock 
was received in a distribution in redemption of the stock of the 
acquiring corporation. Accordingly, the proposed section 302 
regulations also would apply to these transactions.

[[Page 20045]]

    Section 302 does not prescribe the treatment of the basis of the 
redeemed stock if the redemption is treated as a distribution to which 
section 301 applies. In 1955, the IRS and Treasury Department 
promulgated Sec.  1.302-2(c), which states that ``[i]n any case in 
which an amount received in redemption of stock is treated as a 
distribution of a dividend, proper adjustment of the basis of the 
remaining stock will be made with respect to the stock redeemed.'' The 
regulation contains three examples illustrating a proper adjustment. In 
two examples, the redeemed shareholder continues to own stock of the 
redeeming corporation immediately after the redemption. In those cases, 
the basis of the redeemed shares shifts to, and increases the basis of 
the shares still owned by, the redeemed shareholder. In the third 
example, the redeemed shareholder does not directly own any stock of 
the redeeming corporation immediately after the redemption. He does, 
however, constructively own stock of the redeeming corporation 
immediately after the redemption because of his wife's ownership of 
stock in the redeeming corporation. The example concludes that the 
redeemed shareholder's basis in the shares surrendered in the 
redemption shifts to increase his wife's basis in her shares of stock 
of the redeeming corporation.
    The proposed regulations provide that the basis of redeemed stock 
will not shift to other shares directly owned by the redeemed 
shareholder or to shares owned by any other person whose ownership is 
attributed to the redeemed shareholder. Instead, the proposed 
regulations provide that when section 302(d) applies to a redemption of 
stock, to the extent the distribution is a dividend under section 
301(c)(1), an amount equal to the adjusted basis of the redeemed stock 
is treated as a loss recognized on the date of the redemption. The 
loss, generally, would be taken into account either when the facts and 
circumstances that caused the redemption to be treated as a section 301 
distribution no longer exist, or when the redeemed shareholder 
recognizes a gain on the stock of the redeeming corporation (to the 
extent of such gain).
    The IRS and Treasury Department received many comments regarding 
the proposed regulations, several of which were critical of the 
approach of the proposed regulations. Generally, these comments 
expressed two predominant concerns. First, commentators stated that the 
approach of the proposed regulations was an unwarranted departure from 
current law. Second, commentators were concerned that the interaction 
of the proposed regulations with the consolidated return rules could 
create the potential for two levels of tax instead of one in certain 
transactions. After considering all the comments, the IRS and Treasury 
Department have decided to withdraw the proposed regulations.
    The IRS and Treasury Department are continuing to study the 
approach of the proposed regulations and other approaches on the 
treatment of the basis of redeemed stock and request further comments. 
In particular, the IRS and Treasury Department are interested in 
comments on whether a difference should be drawn between a redemption 
in which the redeemed shareholder continues to have direct ownership of 
stock in the redeemed corporation (whether the same class of stock as 
that redeemed or a different class) and a redemption in which the 
redeemed shareholder only constructively owns stock in the redeemed 
corporation. The IRS and Treasury Department are also interested in 
comments in the following two areas: (i) Whether a different approach 
is warranted for corporations filing consolidated income tax returns; 
and (ii) whether a different approach is warranted for section 
304(a)(1) transactions.
    Additionally, the IRS and Treasury Department are studying other 
basis issues that arise in redemptions that are treated as section 301 
distributions. Specifically, the IRS and Treasury Department are 
studying whether, under section 301(c)(2), basis reduction should be 
limited to the basis of the shares redeemed or whether it is 
appropriate to reduce the basis of both the retained and redeemed 
shares before applying section 301(c)(3). The preamble to TD 9250, 71FR 
8802, indicated that the IRS and Treasury Department believe that the 
better view of current law is that only the basis of the shares 
redeemed may be recovered under section 301(c)(2). However, the IRS and 
Treasury Department are considering other approaches. For example, 
another approach would be to allocate the section 301(c)(2) portion of 
the distribution pro rata among the redeemed shares and the retained 
shares. A third approach would be to shift the basis of the shares 
redeemed to the remaining shares and then reduce the basis of those 
shares pursuant to section 301(c)(2). The IRS and Treasury Department 
request comments about these approaches or other approaches regarding 
circumstances in which section 301(c)(2) applies.

Drafting Information

    The principal author of this withdrawal notice is Theresa M. Kolish 
of the Office of the Associate Chief Counsel (Corporate).

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirement.

Withdrawal of Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, the notice of 
proposed rulemaking published in the Federal Register on October 18, 
2002 (67 FR 64331) is hereby withdrawn.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E6-5811 Filed 4-18-06; 8:45 am]
BILLING CODE 4830-01-P