Coastal Drillers Tax Memorandum Essay
SUBJECT: Jeremiah Cranston/Coastal Drillers, Inc.
Recently, Jeremiah Cranston contacted our office in regards to him possibly providing services under a consulting agreement for Coastal Drillers, Inc. He is concerned about the stock redemption that was completed six years ago and what effect, if any, working as an independent contractor might have on him regarding the redemption.
Facts: Coastal Drillers, Inc. is owned 100% by the Cranston family. Six years ago Jeremiah Cranston redeemed all of his directly owned stock in Coastal Drillers. This redemption resulted in a qualified complete termination redemption of stock allowing Jeremiah to recognize a long-term capital gain on the …show more content…
Conclusion: The position taken by the Internal Revenue Service along with case history that has been cited, would indicate that if Jeremiah performs services as an independent contractor for Coastal Drillers, Inc., he would hold a prohibited interest in the corporation within 10 years of his stock redemption, which violates §302(c)(2)(A)(i) and §302(c)(2)(A)(ii). Therefore, Jeremiah no longer meets the requirements to waive the family attribution rule under §318. Jeremiah’s stock redemption from Coastal Drillers, Inc., would fail to qualify for a complete redemption under §302(b)(3). The money Jeremiah received from the corporation in redemption of his shares would be classified as a dividend distribution, taxable as ordinary income.
The first step in our tax research was to ensure that we understood the issue being questioned which