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Six years ago, Coastal Drillers, Inc., redeemed all of the stock owned directly by Jeremiah Cranston (6870 Vinton Court, Los Angeles, CA 90034). At the time of the redemption, Jeremiah and his immediate family members owned 100% of the stock of Coastal Drillers. Jeremiah satisfied all of the requirements of the family attribution waiver [under Section 302(C)(2)]; thus, the transaction qualified as a complete termination redemption and resulted in a significant long-term capital gain. Coastal Drillers’ E & P at the time of the transaction exceeded the redemption proceeds. Treatment of the redemption proceeds as a dividend would have resulted in a $200,000 greater tax liability for Jeremiah.
In the current year, Coastal Drillers has offered Jeremiah a consulting engagement. The consulting engagement would be for a one-year term, but options to renew could extend the contract to a total of five years. Assuming that all options are exercised, Jeremiah would earn $150,000 under the contract. Based on the terms of the contract, Jeremiah would properly be classified as an independent contractor, not as an employee of Coastal Drillers. Jeremiah has contacted you regarding the effect, if any, of the proposed consulting engagement on the tax treatment of his earlier stock redemption.
Required – > Prepare a letter to Jeremiah in response to his inquiry. To properly respond, your letter should incorporate a discussion of the purpose and intent of IRS Code Section 302 as well as a summarization of the provisions of each subsection (a), (b), (C), and (D). If you determine that Jeremiah does NOT meet the provisions of Section 302 (C)(2) – could a different subsection (a, b, or d) be relied upon to allow Jeremiah’s capital gain treatment?
Use IRS Code. And use reliable online sources for other sources, .org .net .gov websites etc. Please avoid using print sources other than IRS.
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