Coastal Drillers Tax Memorandum Essay

1263 Words Nov 19th, 2013 6 Pages
TAX FILE MEMORANDUM DATE:
FROM:
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
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If as an independent contractor results in Jeremiah holding prohibited interest in the corporation then he would no longer meet the requirements to waive the family attribution rule and would still own the stock directly or indirectly owned by his spouse, children, grandchildren and parents. Jeremiah’s immediate family members own 100% of the stock in Coastal Drillers. Therefore, even though Jeremiah redeemed all his stock in Coastal Drillers he would still be considered owning 100% of the stock that his spouse, children, grandchildren and parents own.
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.

Research Steps

The first step in our tax research was to ensure that we understood the issue being questioned which

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