Coastal Drillers Tax Memorandum
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 redemption proceeds. Jeremiah satisfied all the requirements to waive the family attribution rule to qualify for sale or exchange treatment on the redemption. Coastal Drillers has now offered Jeremiah a one year consulting engagement, as an independent contractor, with the ability to renew the contract for up to a total of 5 years, averaging $30,000 per year in compensation.
Issue: Does Jeremiah hold prohibited interest §302(c)(2)(A)(i) in Coastal Drillers, Inc. by being an independent contractor during the ten year period following his complete termination redemption?
Authority/Law: §302(c)(2)(A) provides that constructive ownership of stock owned by family members as defined by §318(a)(1) does not apply to a complete termination redemption of stock, if immediately after a distribution the distributee does not hold interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor [§302(c)(2)(A) (i)] and the distributee does not acquire any such interest 10 years from the date of such distribution [§302(c)(2)(A)(ii)]. Under §318(a)(1)(A) an individual shall be considered as owning the stock owned, directly or indirectly, by or for their spouse [§318(a)(1)(A)(i)],
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 redemption proceeds. Jeremiah satisfied all the requirements to waive the family attribution rule to qualify for sale or exchange treatment on the redemption. Coastal Drillers has now offered Jeremiah a one year consulting engagement, as an independent contractor, with the ability to renew the contract for up to a total of 5 years, averaging $30,000 per year in compensation.
Issue: Does Jeremiah hold prohibited interest §302(c)(2)(A)(i) in Coastal Drillers, Inc. by being an independent contractor during the ten year period following his complete termination redemption?
Authority/Law: §302(c)(2)(A) provides that constructive ownership of stock owned by family members as defined by §318(a)(1) does not apply to a complete termination redemption of stock, if immediately after a distribution the distributee does not hold interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor [§302(c)(2)(A) (i)] and the distributee does not acquire any such interest 10 years from the date of such distribution [§302(c)(2)(A)(ii)]. Under §318(a)(1)(A) an individual shall be considered as owning the stock owned, directly or indirectly, by or for their spouse [§318(a)(1)(A)(i)],