301 / How can attribution of stock ownership among family members be avoided?

In attempting to qualify under the complete redemption rules ( Q 300), the adverse effect of family attribution rules, that is, the rules that attribute stock ownership between family members as distinct from other attribution rules that attribute stock ownership from or to estates, trusts, or business entities, ordinarily may be overcome if a shareholder from whom stock is redeemed:

(1)     retains no interest in the corporation except as a creditor immediately after redemption;

(2)     does not acquire any such interest other than stock acquired by bequest or inheritance within 10 years after the date of the redemption; and

(3)     files an agreement, called a waiver agreement, to notify the IRS of a redeeming shareholder’s acquisition of a forbidden interest within the 10-year period.¹

With respect to distributions after August 31, 1982, an entity such as a trust or estate that terminates its interest may waive family attribution rules as long as the related party, that is, a beneficiary, stockholder, or partner through whom ownership of stock is attributed to the entity, joins in the waiver. The language of the IRC prohibits waiver of entity attribution.²

Family attribution rules will not be waived (1) if any portion of redeemed stock was acquired, directly or indirectly, by a redeeming shareholder within 10 years before redemption from any member of the shareholder’s family named in the family attribution rules, or (2) if any member of a redeeming shareholder’s family named in the family attribution rules owns stock in the corporation at the time of the redemption and the person acquired any stock in the corporation from the redeeming shareholder within 10 years before the redemption, unless the acquired stock is redeemed in the same transaction.

The foregoing limit does not apply if an acquisition (as in (1)) or a disposition (as in (2)) by a redeeming shareholder did not have as one of its principal purposes avoidance of federal income tax.³

One ruling illustrates the application of this limit on the limitation. A son and his father’s estate owned all the outstanding stock of X corporation. The son’s mother was the sole beneficiary of the estate. The son was active in the business; his mother was not. After the executor distributed the stock to the mother, X corporation redeemed all the mother’s stock so that the son could have complete ownership of X corporation. The mother’s waiver agreement was effective to prevent the attribution to her of her son’s stock, even though she had acquired the redeemed stock indirectly from her husband within 10 years of the redemption, because her acquisition of the stock did not have as one of its principal purposes the avoidance of federal income tax.⁴