Conversion of Common to Preferred Stock - Section 306 Stock - 1042 Transaction

[Guest JVH]

We are looking at converting 51% of the shareholder's common stock to preferred in order to pay a dividend to amortize the acquisition note in a 1042 transaction. There is one Rev. Rul. that talks about a situation where the common was converted into another class of "common" with a dividend preference, and the holding is the new stock is not 306 Stock. However, in the state at issue here, state law says if stock has a preference as to dividends or liquidation, it is "preferred stock." Should state law matter here. If all the facts are the same as the Rev. Rul. except that the new stock is "preferred" under state law, should 1042 treatment be allowed. Have you ever seen such deals done prior to a 1042?

[Kirk Maldonado]

There are some serious issues about whether doing that would cause the stock to fail to satisfy section 1042. I seem to recall that the late Jack Curtis wrote an article about this very topic. If I remember correctly, which is always an iffy proposition, it was published in BNA's Compensation Planning Journal a little more than ten years ago.