QSP – Purchase & Related Person Redemption Explained
On January 1 of Year 1, P purchases 60 of the 100 shares of X stock. On that date, X owns 40 of the 100 shares of T stock, and an unrelated person owns the other 60 shares. Because P owns more than 50% of X, X is a person related to P, and X’s 40 shares of T are treated as constructively owned by P under the attribution rules.
On April 1 of Year 1, two things happen. T redeems X’s 40 shares of T stock, and P purchases the remaining 60 shares of T directly from the unrelated person. For purposes of the 80-percent ownership requirement of section 338(d)(3), the redemption of the T stock held by X — a person related to P — is taken into account as a reduction in T’s outstanding stock.
After the redemption, T has only 60 shares outstanding, all of which P purchased on April 1. P’s 60 shares therefore represent 100% of T’s outstanding stock — well above the 80% threshold. Accordingly, P makes a qualified stock purchase of T on April 1 of Year 1.
The regulation contrasts this outcome with a hypothetical purchase of the redeemed shares: had P instead bought the 40 shares from X, all 40 would have been treated as purchased during the 12-month acquisition period under section 338(h)(3)(C)(i), and the analysis would follow section 338(d)(3) differently. Here, taking the redemption into account is what produces the qualified stock purchase.
