Question

Your firm has a new individual client, Carla Navarro, who has been assigned to you for preparation of the current year’s tax return. Upon review of Carla’s tax returns from prior years, you notice that she reported a large capital gain from a stock redemption in 2018. Upon further investigation, you determine that stock in the corporation was owned by some of Carla’s family members at the time of the redemption and that the only way the redemption would have qualified for sale or exchange treatment would have been if Carla had availed herself of the family attribution waiver for a complete termination redemption. You establish that the redemption terminated Carla’s direct stock ownership in the corporation, that she had no interest in the corporation since the redemption, and that she retained all records pertaining to the redemption. However, you cannot find any evidence that the notification agreement required of a family attribution waiver was properly filed. When asked about the missing agreement, Carla indicated that she knew nothing about any required agreement and that if such an agreement was required, her previous CPA should have taken care of it. Your partner has asked you to research whether it is still possible to file an effective family attribution waiver agreement for Carla. In a memo for the tax file, summarize the results of your research.

Answer 1

Refer the below images for the above mentioned question, in a detailed way of explanation.

Tax File Memorandum : Date: January 20, 2020 From: ASHOK KUMAR M subject : Carla Navarro Facts : Carla Navarro, a new client of the firm, reported a large capital gain from a Stock Vedemption in 2008. Because family members oured Stole in the corporation at the time of the redemption the only way the redemption could quality for Sale Cory exchange is it the family attribution waiver was used for a complete termination redemption The redemption terminated Carla's direct stock ownership in the corporation. She has had no interest in the Corporation since the redemption, and she has retained all relevant records of the redemption. However, there is no evidence that the notification agreement Nearuired family attribution was ver was filed with the 2018 tax return. calla stated that she was unaware of any requirement for the agreement to be filed and that if one was required, her prior cat should have so filed. At Issue: can the notification agreement required of a family attribution waiver still be filed so that the 2018 redemption qualities for Sale cor) exchange treatment as a complete termination redemption ?

Conclusion: The agreement to notify the IRS of any prohibited interest acquired in the to- year post redemption period is required to be filed "at such time and in Soch manner" as provided in the regulations [$30 2008(2)(nis. According to Reg. & 1-302-4(a) the agreement must be filed with the tax payer's first return for the taxable year for which redemption occurs. The agreement must include a Statement declaring that the tax payer has hist acazared a prohibited interest in the corporation since the redemption and that the taxpayer will notify the IRS within 30 days of acquiring a prohibited interest within the 10-year post redemption perrod The Regulation's requirement not Standing, there as significant support for the filing of an effective late notification agreement. Courts have held late-filed agreements to be effective when there has been in substantial compliance rather than "Strick compliance with the underlying Regulation. In cases toxpayers failure to file the agreement with the original retor was an inadvertent mistake and the agreement was timely fited with an amended return the courts have held the agreement to be effective for purposes of the family attribution waiver [see, e.g., U.S. v. van Leppel, 67.2 USTC 9683, 12 AFTR ad 5622 321 F.2d 717 (CA-10, 1963) and Georgie s. Cary, u. 9.c. 214 (1963), non acay. 1964-2 c.B. 8 (amen return filed after issue discovered during audit). An agreement filed after the statutory period for an amended return can also be effective. [see, eg. Edward J. Fehrs, 77 -1 OSTC 9423, 40 AFTR ad 5040, 214 ctacl. 74 (1977) (where taxpayer could not have reasonably expected an agreement was reafuired, tax payer filed agfeement as soon as reasonable betef was formed that one was required,

and agreement was filed before issues presented in trial)] Thus, a complete and proper family attribution waiver agreement filed with a timely amended 2018 tax retorn for carta should be effective for the redemption to quality for sale (or) exchange treatment as a complete dermination redemption.