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The Matrimonial StrategistLJN NewslettersNewsSections

New Regulation Helps Plan Stock Redemptions

By Thomas R. White III
October 06, 2003

The U.S. Treasury Department has promulgated a final tax regulation intended to remove the uncertainty surrounding the tax treatment of stock redemptions that resulted from recent case law. Treasury Decision 9035, 68 Fed. Reg. 1534 (Jan. 10). The final regulation adopts and expands upon the proposed regulations that were issued by the Department in August 2001.

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.

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