Question

ABCD is owned by the following individuals (none who are related):

A = 400 shares

B = 200 shares

C= 350 shares

D = 375 shares

Stockholder A wants ABCD, inc. to redeem enough shares to qualify as a sale (exchange) rather than a dividend. How many shares must be sold?

Please show work and explain.

Answer 1

Ans :

A stock redemption qualifies for sale or exchange treatment under § 302(b)(2) as a disproportionate redemption if the following conditions are met:

• The distribution is substantially disproportionate. To be substantially disproportionate, the shareholder must own, after the distribution, less than 80 percent of the interest owned in the corporation before the redemption
• The shareholder owns, after the distribution, less than 50 percent of the total combined voting power of all classes of stock entitled to vote.

For example, if a shareholder owns a 70 percent interest in a corporation that redeems part of the stock, the redemption is substantially disproportionate only if the shareholder’s ownership interest after the redemption is less than 56 percent (80 percent of 70 percent).

Accordingly, stockholder A's share is 30.19% (400/1325 _* 100). If stockholder A wants ABCD Inc. to redeem enough shares to qualify as a sale (exchange) rather than a dividend then A have to redeem 80 shares the calculation of which is as follows:

Total no. of shares hold by A - 400

Percentage of holding            - 30.19%

Percentage of shareholding required to be substantially disproportionate after redemption - 24.152% (80% of 30.19%)

Number of shares required to be substantially disproportionate after redemption - 320 shares (24.152% of 1325 shares)

Number of shares to be redeemed - 80 shares (400 - 320)