Question

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 55 shares with a basis of $4,400, and Clyde owns the remaining 45 shares with a basis of $16,500. At year-end, Getaway is considering different alternatives for redeeming some shares of stock. Evaluate whether each of the following stock redemption transactions will qualify for sale and exchange treatment. (Leave no answer blank. Enter zero if applicable.)

Required:

1. Getaway redeems 5 of Bonnie’s shares for $2,000. Getaway has $29,000 of E&P at year-end and Bonnie is unrelated to Clyde.
2. Getaway redeems 28 of Bonnie’s shares for $5,000. Getaway has $29,000 of E&P at year-end and Bonnie is unrelated to Clyde.
3. Getaway redeems 7 of Clyde’s shares for $2,500. Getaway has $29,000 of E&P at year-end and Clyde is unrelated to Bonnie.

before the redemption and % after the redemption. Does this qualify as a sale or exchange? If so, how much is the gain?

Answer 1

Answer 1
	Answer	Remarks
% before the redemption	55%
% after the redemption	53%	Number of share after redemption owned by bonnie = 55 -5 = 50 shares and total share of Getaway Corporation = 50 + 45 = 95 share. (50/95)
Does this qualify as a sale or exchange?	No	Bonnie still has control of the corporation after the redemption more than 50%. So it is does not consider as sale or exchange
If so, how much is the gain?	Not applicable
Answer 2
	Answer	Remarks
% before the redemption	55%
% after the redemption	38%	Number of share after redemption owned by bonnie = 55 -28 = 27 shares and total share of Getaway Corporation = 27 + 45 = 72 share. (27/72)
Does this qualify as a sale or exchange?	Yes	Bonnie has control of the corporation after the redemption not more than 50%. In addition Bonnie’s share of the outstanding stock after the redemption has dropped by more than 80% of her percentage ownership before the redemption. (55%*80%=44%) So redemption pass above both test. Hence, this qualify as a sale or exchange.
If so, how much is the gain?	$    2,760	as below calculation
Sale proceeds	$    5,000
Less: acquired cost	$    2,240	(4400*28/55)
Capital gain	$    2,760
Answer 3
	Answer	Remarks
% before the redemption	45%
% after the redemption	41%	Number of share after redemption owned by clyde = 45 - 7 = 38 shares and total share of Getaway Corporation = 55 + 38 = 93 share. (38/93)
Does this qualify as a sale or exchange?	No	clyde has control of the corporation after the redemption not more than 50%. In addition clyde’s share of the outstanding stock after the redemption has not dropped by more than 80% of her percentage ownership before the redemption. (45%*80% = 36%) So redemption pass 50% test but fails the 80% test. Hence, this redemption might still qualify not essentially equivalent to a dividend. Clyde does not have control of the Getaway corporation and he has suffered a significant reduction in his ownership.
If so, how much is the gain?	Not applicable