New Regulation Helps Plan Stock Redemptions

To understand the significance of the final regulation, it is helpful to review the transaction pattern that these regulations address. In our example, Spouse B (the business spouse) operates a business that is owned by a corporation (X Corp.), all the stock of which is owned by B or by B and N (the non-business spouse) as marital property. Pursuant to the marital settlement agreement between B and N, B will end up owning all the stock of the corporation, through which B will continue to operate the business, and N will be paid his or her share in cash, usually through deferred payments. The parties anticipate that the income used to make the deferred payments will be generated by the business, and that payments to N for N's marital share will be made ' directly or indirectly ' by X Corp. The income used for this purpose is taxable to either or both spouses. How much and to whom will depend on the structure of the settlement worked out by the parties.