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6. Moon Corporation (E&P of $700,000) has 4,000 shares of common stock outstanding. The shares are...

6. Moon Corporation (E&P of $700,000) has 4,000 shares of common stock outstanding. The shares are owned as follows:

Andy 2,000 shares

Darlene (Andy’s daughter) 1,500 shares

Wendy (Andy’s aunt) 500 shares

In the current year, Moon redeems all of Andy’s shares. Determine whether the redemption can qualify for sale or exchange treatment under the complete termination of a shareholder’s interest rules in each of the following independent circumstances. Assume that in a. – d Andy completes and submits the appropriate waiver.

a.    Andy remains as a director of Moon Corporation.

b.    Three years after the redemption, Andy loans $100,000 to Moon Corporation and receives in return a two-year note receivable.

c.     Darlene replaces Andy as president of Moon Corporation.

d.    Six years after the redemption, Andy receives 250 shares in Moon as a gift from Wendy.

Assume that Andy is not related to Darlene or Wendy. How would you answers to a – d change (discuss your answers in a1 to e1 below).

a1. Andy remains as a director of Moon Corporation.

b1. Three years after the redemption, Andy loans $100,000 to Moon Corporation and receives in return a two-year note receivable.

c1. Darlene replaces Andy as president of Moon Corporation.

d1. Six years after the redemption, Andy receives 250 shares in Moon as a gift from Wendy.

Solutions

Expert Solution

As per the law's language, directly quoted here:

A stock redemption that terminates a shareholder’s entire stock ownership in a corporation will qualify for sale or exchange treatment under § 302(b)(3). The attribution rules generally apply in determining whether the shareholder’s stock ownership has been completely terminated. However, the family attribution rules do not apply to a complete termination redemption if the following conditions are met:

  • The former shareholder has no interest, other than that of a creditor, in the corporation for at least 10 years after the redemption (including an interest as an officer, director, or employee).
  • The former shareholder files an agreement to notify the IRS of any prohibited interest acquired within the 10-year period and to retain all necessary records pertaining to the redemption during this time period.

Thus, answers for a to d would be as follows:

a) It would not be an sale or exchange as he holds office of director

b) It would be a sale or exchange because he has no interest other than being the creditor

c) It would be a sale or exchange because he has no interest including directorship

d) It would be a sale or exchange because he has received shares or prohibited interst

a1) Answer would be same and it would not be sale or exchange because he is still holding prohibited interest

a2)  It would be a sale or exchange because he has no interest other than being the creditor

a3) It would be sale or exchange

a4) It would not be sale or exchange

ekkarill92 answered 1 year ago
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