Ted is the sole shareholder of Zero Corporation. Before his retirement from the company, he gave 100 shares of Zero stock to his son. A few months later, Ted sold his remaining 1,900 shares to Zero for $2 million. The company has E&P exceeding $2 million. Ted’s basis in his 2,000 shares before the two transfers was $80,000. Ted requested a waiver of the Sec. 318 attribution rules and treated the redemption of Zero stock as a long-term capital gain. Ted also agreed to serve as a consultant to the company. The terms of the agreement are that Ted will be paid as an independent contractor $175 per hour plus expenses. The agreement does not specify a minimum number of hours of services to be provided each month. Three years later the IRS audits Ted’s return and argues that the redemption should be treated as a dividend under Sec. 301. Have the Sec. 302(c)(2) requirements that permit a waiver of the family attribution rules been met?
A partial list of research sources is:
• Secs. 302(c)(2) and (b)(3)
• Reg. Sec. 1.302-4
• Estate of Milton S. Lennard v. CIR, 61 T.C. 554 (1974)
• William M. Lynch v. CIR, 58 AFTR 2d 86-5970, 86-2 USTC ¶9731 (9th Cir., 1986)