Year of Award
Master of Science in Taxation (MST)
College of Business & Professional Studies
shareholder, redemption, capital, interest
The tax consequences surrounding the stock purchase agreement present opportunities as well as pitfalls in planning for the transfer of a stock interest.
The stock purchase agreement can take the form of a stock redemption, a cross purchase or any combination of the two methods.
The tax implications surrounding the stock purchase agreement must be considered in context of the statutory framework effecting transfers of stock, as well as the judicial decisions which attempt to interpret the intent of Congress.
The taxability of a distribution of corporate funds pursuant to a stock redemption plan can vary based upon the facts and circumstances underlying the transaction. A distribution of corporate funds is generally taxable as an ordinary dividend to the extent of earnings and profits. However, provided that certain tests are met, the distribution may fall under a statutory exception and be treated as a capital transaction.
Under the cross purchase agreement, an unconditional obligation to purchase the stock of a fellow shareholder is created. Where the stock is purchased by the corporation, in satisfaction of the shareholder's obligation, constructive dividend issues arise.
This paper will analyze the requirements and pitfalls surrounding the stock redemption plan. In addition, this paper will also address the issue of constructive dividends under the cross purchase plan, as well as the basis for inferring the constructive dividend in light of judicial decisions.
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Russo, Joseph Gerard, "The Stock Purchase Agreement - Pitfalls Which Can Result in Actual and Constructive Dividend Income" (1993). Theses, Dissertations, and Capstone Projects. 305.
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