11. Abigail and Burton (unrelated individuals) own 50 shares each of the No Exit Corporation. There...

11. Abigail and Burton (unrelated individuals) own 50 shares each of the No Exit Corporation. There are no other outstanding shares. If Abigail redeems 25 shares, will the redemption qualify as a substantially disproportionate redemption? Explain. Attach Internal Revenue Code Section

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Expert Solution

As per 26 U.S. Code § 302 - Distributions in redemption of stock,

The distribution is substantially disproportionate if—

(i) the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time,

is less than 80 percent of—

(ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time.

For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholder’s ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence. For purposes of the preceding sentence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value.

Here, Abigail will have 75% ownership after the redemption of shares. (50+25)/100.

This is less than 80%. So, this the redemption will not qualify as a substantially disproportionate redemption.

ekkarill92 answered 1 year ago

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