ACCY 272

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ACCY 272 Session 07 Chapter 5 (A,B,C) REDEMPTION
S AND PARTIAL LIQUIDATIONS (1) Text (Lind
6e), pp. 207-248 Problems, pp. 213,217-218,
233-235, 247-248 Cases, pp. 219-226Lynch,
235-241Davis Revenue Rulings, pp. 226-228RR
85-14, pp. 226-228RR 59-119 pp. 228-229RR
77-293, pp. 241-244RR 85-106 by Hugh Pforsich
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Chapter 5 207-248 Table of Contents

• A. Introduction 207-211
• B. Constructive Ownership of Stock 211-213
• Problems 213
• C. Redemptions Tested at the Shareholder Level
  213-248
• Substantially Disproportionate Redemptions
  213-218
• Revenue Ruling 85-14 215-217
• Problems 217-218
• Complete Termination of a Shareholders Interest
  218-235
• Waiver of Family Attribution 218-231
• Case Lynch v. Commissioner 219-226
• Revenue Ruling 59-119 226-227
• Revenue Ruling 77-293 228-229
• Note 230-231
• b. Corporate Gain or Loss 231-235
• Problems 233-235
• 3. Redemptions Not Essentially Equivalent to a
  Dividend 235-248
• Case United States v. Davis 235-241
• Revenue Ruling 85-106 241-244
• Note 244-247

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A. Introduction 207-211
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B. Constructive Ownership of Stock 211-213
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B. Constructive Ownership of Stock
211-213Problems 213

• 1. Wham Corporation has 100 shares of common
  stock outstanding. Twenty-five shares are owned
  by Grandfather, 20 shares are owned by Mother
  (Grandfather's Daughter), 15 shares are owned by
  Mother's Daughter, 10 shares are owned by
  Mother's adopted Son, and the remaining 30 shares
  are owned by Grandmother's estate, of which
  Mother is a 50 beneficiary. One of Mother's
  cousins is the other beneficiary of the estate.
  Mother also has an option to purchase 5 of Son's
  shares. How much Wham stock do Grandfather,
  Mother's Daughter and Grandmother's estate own
  after application of 318?

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B. Constructive Ownership of Stock
211-213Problems 213

• 2. All the 100 shares of Xerxes Corporation are
  owned by Partnership, in which A, B, C and D (all
  unrelated to each other) are equal partners. W,
  A's wife, owns all of the 100 shares of Yancy
  Corporation.
• (a) How many shares, if any, of Xerxes
  Corporation are owned by A, W, and M (W's
  mother)?
• (b) How many shares, if any, of Xerxes are owned
  by Yancy? Would Yancy constructively own any
  shares of Xerxes if W owned only 10 percent of
  Yancy?
• (c) How many shares, if any, of Yancy are owned
  by Partnership, B, C, D and Xerxes?

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B. Constructive Ownership of Stock
211-213Problems 213

• 2. All the 100 shares of Xerxes Corporation are
  owned by Partnership, in which A, B, C and D (all
  unrelated to each other) are equal partners. W,
  A's wife, owns all of the 100 shares of Yancy
  Corporation.
• (a) How many shares, if any, of Xerxes
  Corporation are owned by A, W, and M (W's mother)?

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B. Constructive Ownership of Stock
211-213Problems 213

• 2. All the 100 shares of Xerxes Corporation are
  owned by Partnership, in which A, B, C and D (all
  unrelated to each other) are equal partners. W,
  A's wife, owns all of the 100 shares of Yancy
  Corporation.
• (b) How many shares, if any, of Xerxes are owned
  by Yancy? Would Yancy constructively own any
  shares of Xerxes if W owned only 10 percent of
  Yancy?

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B. Constructive Ownership of Stock
211-213Problems 213

• 2. All the 100 shares of Xerxes Corporation are
  owned by Partnership, in which A, B, C and D (all
  unrelated to each other) are equal partners. W,
  A's wife, owns all of the 100 shares of Yancy
  Corporation.
• (c) How many shares, if any, of Yancy are owned
  by Partnership, B, C, D and Xerxes?

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C. Redemptions Tested at the Shareholder Level
213-248
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C. Redemptions Tested at the Shareholder Level
213-248 1. Substantially Disproportionate
Redemptions 213-218
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C. Redemptions Tested at the Shareholder Level
213-248 1. Substantially Disproportionate
Redemptions 213-218 Revenue Ruling 85-14
215-217
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C. Redemptions Tested at the Shareholder Level
213-2481. Substantially Disproportionate
Redemptions 213-218Problems 217-218

• 1. Y Corporation has 100 shares of common stock
  and 200 shares of nonvoting preferred stock
  outstanding. Alice owns 80 shares of Y common
  stock and 100 shares of its preferred stock.
  Cathy owns the remaining 20 shares of Y common
  and 100 shares of Y preferred stock. Alice and
  Cathy are not related. In each of the following
  alternative situations, determine whether the
  redemption satisfies the requirements of
  302(b)(2)
• (a) On January 15, Y Corporation redeems 75 of
  Alice's preferred shares.
• (b) Same as (a), above, except that Y also
  redeems 60 shares of Alice's common stock.
• (c) Same as (a), above, except that Y also
  redeems 70 shares of Alice's common stock.
• (d) What difference would it make in (c), above,
  if, on December 1 of the same year, Y redeems 10
  shares of Cathy's common stock?

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C. Redemptions Tested at the Shareholder Level
213-2481. Substantially Disproportionate
Redemptions 213-218Problems 217-218

• 1. Y Corporation has 100 shares of common stock
  and 200 shares of nonvoting preferred stock
  outstanding. Alice owns 80 shares of Y common
  stock and 100 shares of its preferred stock.
  Cathy owns the remaining 20 shares of Y common
  and 100 shares of Y preferred stock. Alice and
  Cathy are not related. In each of the following
  alternative situations, determine whether the
  redemption satisfies the requirements of
  302(b)(2)
• (a) On January 15, Y Corporation redeems 75 of
  Alice's preferred shares.

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C. Redemptions Tested at the Shareholder Level
213-2481. Substantially Disproportionate
Redemptions 213-218Problems 217-218

• 1. Y Corporation has 100 shares of common stock
  and 200 shares of nonvoting preferred stock
  outstanding. Alice owns 80 shares of Y common
  stock and 100 shares of its preferred stock.
  Cathy owns the remaining 20 shares of Y common
  and 100 shares of Y preferred stock. Alice and
  Cathy are not related. In each of the following
  alternative situations, determine whether the
  redemption satisfies the requirements of
  302(b)(2)
• (b) Same as (a), above, except that Y also
  redeems 60 shares of Alice's common stock.

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C. Redemptions Tested at the Shareholder Level
213-2481. Substantially Disproportionate
Redemptions 213-218Problems 217-218

• 1. Y Corporation has 100 shares of common stock
  and 200 shares of nonvoting preferred stock
  outstanding. Alice owns 80 shares of Y common
  stock and 100 shares of its preferred stock.
  Cathy owns the remaining 20 shares of Y common
  and 100 shares of Y preferred stock. Alice and
  Cathy are not related. In each of the following
  alternative situations, determine whether the
  redemption satisfies the requirements of
  302(b)(2)
• (c) Same as (a), above, except that Y also
  redeems 70 shares of Alice's common stock.

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C. Redemptions Tested at the Shareholder Level
213-2481. Substantially Disproportionate
Redemptions 213-218Problems 217-218

• 1. Y Corporation has 100 shares of common stock
  and 200 shares of nonvoting preferred stock
  outstanding. Alice owns 80 shares of Y common
  stock and 100 shares of its preferred stock.
  Cathy owns the remaining 20 shares of Y common
  and 100 shares of Y preferred stock. Alice and
  Cathy are not related. In each of the following
  alternative situations, determine whether the
  redemption satisfies the requirements of
  302(b)(2)
• (d) What difference would it make in (c), above,
  if, on December 1 of the same year, Y redeems 10
  shares of Cathy's common stock?

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C. Redemptions Tested at the Shareholder Level
213-2481. Substantially Disproportionate
Redemptions 213-218Problems 217-218

• 2. Z Corporation has 100 shares of voting common
  stock and 200 shares of nonvoting common stock
  outstanding. Every share of Z common stock has a
  fair market value of 100. Don owns 60 shares of
  Z voting common stock and 100 shares of Z
  nonvoting common stock. Jerry owns all of the
  remaining Z stock. Don and Jerry are not related
  to one another. If Z redeems 30 of Don's voting
  common shares, will the redemption qualify for
  exchange treatment under 302(b)(2)?

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235
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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235a. Waiver of
Family Attribution 218-231
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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235a. Waiver of
Family Attribution 218-231Case Lynch v.
Commissioner 219-226

• Code
• Issues
• Facts Analysis
• Holding

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235a. Waiver of
Family Attribution 218-231Revenue Ruling
59-119 226-227
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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235a. Waiver of
Family Attribution 218-231Revenue Ruling
77-293 228-229
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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235a. Waiver of
Family Attribution 218-231Note 230-231
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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235
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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 1. Randall Corporation is owned by John, John's
  daughter Alison and Alison's son Chuck. John owns
  100 shares of Randall stock, Alison owns 50
  shares and Chuck owns 25 shares. Consider whether
  the following redemptions (in year one) qualify
  as an exchange under 302(b)(3)
• (a) Randall redeems Alison's entire 50 shares
  for cash.
• (b) Same as (a), above, except that Alison fails
  to file the agreement required in
  302(c)(2)(A)(iii)? What is the purpose of this
  requirement?
• (c) Same as (a), above, except the price paid
  for Alison's shares is contingent upon Randall's
  future profits?
• (d) Randall redeems 20 of Alison's shares for
  cash on January 1 of year one and the remaining
  30 shares for cash on January 1 of year two.
• (e) Same as (a), above, except Alison remains as
  a director of Randall?
• (f) Same as (a), above, except that, two years
  after the redemption, Randall forms a new
  subsidiary and Alison becomes an employee of the
  subsidiary?
• (g) Same as (a), above, except that two years
  after the redemption Chuck dies and leaves his
  Randall shares to Alison?

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 1. Randall Corporation is owned by John, John's
  daughter Alison and Alison's son Chuck. John owns
  100 shares of Randall stock, Alison owns 50
  shares and Chuck owns 25 shares. Consider whether
  the following redemptions (in year one) qualify
  as an exchange under 302(b)(3)
• (a) Randall redeems Alison's entire 50 shares
  for cash.

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 1. Randall Corporation is owned by John, John's
  daughter Alison and Alison's son Chuck. John owns
  100 shares of Randall stock, Alison owns 50
  shares and Chuck owns 25 shares. Consider whether
  the following redemptions (in year one) qualify
  as an exchange under 302(b)(3)
• (b) Same as (a), above, except that Alison fails
  to file the agreement required in
  302(c)(2)(A)(iii)? What is the purpose of this
  requirement?

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 1. Randall Corporation is owned by John, John's
  daughter Alison and Alison's son Chuck. John owns
  100 shares of Randall stock, Alison owns 50
  shares and Chuck owns 25 shares. Consider whether
  the following redemptions (in year one) qualify
  as an exchange under 302(b)(3)
• (c) Same as (a), above, except the price paid
  for Alison's shares is contingent upon Randall's
  future profits?

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 1. Randall Corporation is owned by John, John's
  daughter Alison and Alison's son Chuck. John owns
  100 shares of Randall stock, Alison owns 50
  shares and Chuck owns 25 shares. Consider whether
  the following redemptions (in year one) qualify
  as an exchange under 302(b)(3)
• (d) Randall redeems 20 of Alison's shares for
  cash on January 1 of year one and the remaining
  30 shares for cash on January 1 of year two.

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 1. Randall Corporation is owned by John, John's
  daughter Alison and Alison's son Chuck. John owns
  100 shares of Randall stock, Alison owns 50
  shares and Chuck owns 25 shares. Consider whether
  the following redemptions (in year one) qualify
  as an exchange under 302(b)(3)
• (e) Same as (a), above, except Alison remains as
  a director of Randall?

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 1. Randall Corporation is owned by John, John's
  daughter Alison and Alison's son Chuck. John owns
  100 shares of Randall stock, Alison owns 50
  shares and Chuck owns 25 shares. Consider whether
  the following redemptions (in year one) qualify
  as an exchange under 302(b)(3)
• (f) Same as (a), above, except that, two years
  after the redemption, Randall forms a new
  subsidiary and Alison becomes an employee of the
  subsidiary?

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 1. Randall Corporation is owned by John, John's
  daughter Alison and Alison's son Chuck. John owns
  100 shares of Randall stock, Alison owns 50
  shares and Chuck owns 25 shares. Consider whether
  the following redemptions (in year one) qualify
  as an exchange under 302(b)(3)
• (g) Same as (a), above, except that two years
  after the redemption Chuck dies and leaves his
  Randall shares to Alison?

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 2. The B B Windshield Wiper Corporation ("B
  B") was organized ten years ago by Betty and
  Billy, who are wife and husband. Betty and Billy
  formed B B by transferring cash and other
  property to the C in exchange for 150 shares of
  the C's common stock. Betty and Billy own B B's
  manufacturing plant and lease the plant to the C
  for an annual rental fee. B B has been very
  successful and has a large amount of accumulated
  earnings and profits.
• Five years ago, Betty and Billy's youngest Son,
  Junior, began working for B B as a clerk in the
  domestic subcompact wiper division. Junior's
  managerial talents were quickly recognized and he
  has risen rapidly in B B's corporate structure.
  Today, Junior is B B's Vice President in charge
  of operations and has overall responsibility for
  production at B B's manufacturing plant.
• Shortly after Junior came to B B, his parents
  agreed that he would eventually take over control
  and management of the company. Betty and Billy
  have now decided that the time has come to
  retire. To implement this decision, their
  accountant has suggested the following plan
• (1) Betty and Billy will give 30 of their 150 B
  B shares to Junior to provide him with an
  ownership interest in the C.
• (2) B B will redeem Betty and Billy's
  remaining 120 shares for 50,000 plus a 400,000
  B B note paying market rate interest. The note
  will be payable monthly over a 20-year term and
  will be secured by an interest in the C's assets.
  Additionally, B B will agree to restrict
  dividend payments, limit new indebtedness, and
  refrain from taking certain extraordinary
  corporate action (e.g., merger or liquidation)
  during the term of the note.
• (3) Betty and Billy will continue to lease the
  manufacturing plant to B B under a lease which
  has a rent escalation clause dependent upon the
  consumer price index. They also will grant B B
  a five year option to purchase the plant at its
  appraised fair market value.
• (a) Will Betty and Billy's redemption be
  classified as an exchange under 302(a)?(b)
• (b) Suppose Betty establishes a management
  consulting firm after leaving B B. What would
  be the tax impact on the redemption if B B
  hired Betty's firm to perform an analysis of its
  proposed entry into the Australian windshield
  wiper market?

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 2. (a) Will Betty and Billy's redemption be
  classified as an exchange under 302(a)?(b)
• (b) Suppose Betty establishes a management
  consulting firm after leaving B B. What would
  be the tax impact on the redemption if B B
  hired Betty's firm to perform an analysis of its
  proposed entry into the Australian windshield
  wiper market?

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 3. Cinelab Corporation has 100 shares of common
  stock outstanding. John owns 50 shares and Mary,
  John's sister, owns 30 shares. The other 20
  shares are owned by the Estate of Sam Sam was
  John and Mary's father.
• Their mother, Bella, is the sole beneficiary of
  the estate. Consider the tax consequences of the
  following redemptions of Cinelab stock
• (a) Cinelab redeems Estate's 20 shares.
• (b) Same as (a), above, except that Bella is the
  residuary beneficiary of the estate and John and
  Mary each receive specific legacies.
• (c) Same as (a), above, except that John and
  Mary are the residuary beneficiaries of the
  estate.
• (d) Same as (a), above, except the 20 shares
  were owned and redeemed from a trust established
  under Sam's will providing income to Bella for
  her life and the remainder to Nancy, another
  child of Sam and Bella. The life estate and
  remainder have equal actuarial values.
• (e) Any change in the result in (d), above, if
  Nancy acquires stock in Cinelab three years after
  the redemption by the trust?

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 3. Cinelab Corporation has 100 shares of common
  stock outstanding. John owns 50 shares and Mary,
  John's sister, owns 30 shares. The other 20
  shares are owned by the Estate of Sam Sam was
  John and Mary's father.
• Their mother, Bella, is the sole beneficiary of
  the estate. Consider the tax consequences of the
  following redemptions of Cinelab stock
• (a) Cinelab redeems Estate's 20 shares.

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 3. Cinelab Corporation has 100 shares of common
  stock outstanding. John owns 50 shares and Mary,
  John's sister, owns 30 shares. The other 20
  shares are owned by the Estate of Sam Sam was
  John and Mary's father.
• Their mother, Bella, is the sole beneficiary of
  the estate. Consider the tax consequences of the
  following redemptions of Cinelab stock
• (b) Same as (a), above, except that Bella is the
  residuary beneficiary of the estate and John and
  Mary each receive specific legacies.

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 3. Cinelab Corporation has 100 shares of common
  stock outstanding. John owns 50 shares and Mary,
  John's sister, owns 30 shares. The other 20
  shares are owned by the Estate of Sam Sam was
  John and Mary's father.
• Their mother, Bella, is the sole beneficiary of
  the estate. Consider the tax consequences of the
  following redemptions of Cinelab stock
• (c) Same as (a), above, except that John and
  Mary are the residuary beneficiaries of the
  estate.

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 3. Cinelab Corporation has 100 shares of common
  stock outstanding. John owns 50 shares and Mary,
  John's sister, owns 30 shares. The other 20
  shares are owned by the Estate of Sam Sam was
  John and Mary's father.
• Their mother, Bella, is the sole beneficiary of
  the estate. Consider the tax consequences of the
  following redemptions of Cinelab stock
• (d) Same as (a), above, except the 20 shares
  were owned and redeemed from a trust established
  under Sam's will providing income to Bella for
  her life and the remainder to Nancy, another
  child of Sam and Bella. The life estate and
  remainder have equal actuarial values.

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C. Redemptions Tested at the Shareholder Level
213-2482. Complete Termination of a
Shareholders Interest 218-235 b. Corporate
Gain or Loss 231-235Problems 233-235

• 3. Cinelab Corporation has 100 shares of common
  stock outstanding. John owns 50 shares and Mary,
  John's sister, owns 30 shares. The other 20
  shares are owned by the Estate of Sam Sam was
  John and Mary's father.
• Their mother, Bella, is the sole beneficiary of
  the estate. Consider the tax consequences of the
  following redemptions of Cinelab stock
• (e) Any change in the result in (d), above, if
  Nancy acquires stock in Cinelab three years after
  the redemption by the trust?

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42
C. Redemptions Tested at the Shareholder Level
213-2483. Redemptions Not Essentially
Equivalent to a Dividend 235-248
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C. Redemptions Tested at the Shareholder Level
213-2483. Redemptions Not Essentially
Equivalent to a Dividend 235-248Case United
States v. Davis 235-241

• Code
• Issues
• Facts Analysis
• Holding

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C. Redemptions Tested at the Shareholder Level
213-2483. Redemptions Not Essentially
Equivalent to a Dividend 235-248Revenue Ruling
85-106 241-244
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C. Redemptions Tested at the Shareholder Level
213-2483. Redemptions Not Essentially
Equivalent to a Dividend 235-248Note 244-247
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C. Redemptions Tested at the Shareholder Level
213-2483. Redemptions Not Essentially
Equivalent to a Dividend 235-248Problems
247-248

• 1. Z Corporation has 100 shares of common stock
  outstanding, owned by A (28 shares), B (25
  shares), C (23 shares) and D (24 shares.) Unless
  otherwise indicated, assume the SHs are not
  related. In each of the following alternative
  situations, determine whether the redemption is
  not essentially equivalent to a dividend under
  302(b)(1)
• (a) Z redeems 7 shares from A
• (b) Z redeems 5 shares from A, and A and D are
  mother and daughter.
• (c) Z redeems 5 shares from A, and A and B are
  mother and daughter.
• (d) Same as (c), above, except that A has not
  spoken to B since B married "outside her faith."

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C. Redemptions Tested at the Shareholder Level
213-2483. Redemptions Not Essentially
Equivalent to a Dividend 235-248Problems
247-248

• 1. Z Corporation has 100 shares of common stock
  outstanding, owned by A (28 shares), B (25
  shares), C (23 shares) and D (24 shares.) Unless
  otherwise indicated, assume the SHs are not
  related. In each of the following alternative
  situations, determine whether the redemption is
  not essentially equivalent to a dividend under
  302(b)(1)
• (a) Z redeems 7 shares from A

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C. Redemptions Tested at the Shareholder Level
213-2483. Redemptions Not Essentially
Equivalent to a Dividend 235-248Problems
247-248

• 1. Z Corporation has 100 shares of common stock
  outstanding, owned by A (28 shares), B (25
  shares), C (23 shares) and D (24 shares.) Unless
  otherwise indicated, assume the SHs are not
  related. In each of the following alternative
  situations, determine whether the redemption is
  not essentially equivalent to a dividend under
  302(b)(1)
• (b) Z redeems 5 shares from A, and A and D are
  mother and daughter.

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C. Redemptions Tested at the Shareholder Level
213-2483. Redemptions Not Essentially
Equivalent to a Dividend 235-248Problems
247-248

• 1. Z Corporation has 100 shares of common stock
  outstanding, owned by A (28 shares), B (25
  shares), C (23 shares) and D (24 shares.) Unless
  otherwise indicated, assume the SHs are not
  related. In each of the following alternative
  situations, determine whether the redemption is
  not essentially equivalent to a dividend under
  302(b)(1)
• (c) Z redeems 5 shares from A, and A and B are
  mother and daughter.

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50
C. Redemptions Tested at the Shareholder Level
213-2483. Redemptions Not Essentially
Equivalent to a Dividend 235-248Problems
247-248

• 1. Z Corporation has 100 shares of common stock
  outstanding, owned by A (28 shares), B (25
  shares), C (23 shares) and D (24 shares.) Unless
  otherwise indicated, assume the SHs are not
  related. In each of the following alternative
  situations, determine whether the redemption is
  not essentially equivalent to a dividend under
  302(b)(1)
• (d) Same as (c), above, except that A has not
  spoken to B since B married "outside her faith."

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C. Redemptions Tested at the Shareholder Level
213-2483. Redemptions Not Essentially
Equivalent to a Dividend 235-248Problems
247-248

• 2. Y Corporation has 100 shares of common stock
  and 100 shares of nonvoting preferred stock
  outstanding. The preferred stock is not
  convertible into Y common stock and is not 306
  stock (i.e., not stock treated specially in 306
  because of its tax avoidance potential). The Y
  common and preferred stock are owned by the
  following unrelated SHs
• SH CS PS
• A 40 0
• B 20 55
• C 25 15
• D 15 15
• E 0 20
• Will the following alternative redemptions
  qualify for exchange treatment under 302(b)?
• (a) Y redeems 5 preferred shares from E.
• (b) Y redeems all of its outstanding preferred
  stock.

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52
C. Redemptions Tested at the Shareholder Level
213-2483. Redemptions Not Essentially
Equivalent to a Dividend 235-248Problems
247-248

• Suppose an individual SH owns ten shares of
  common stock with a basis of 15,000.
• What happens to the SH's basis if five shares
  are redeemed in a transaction which is properly
  classified as a dividend?
• What if all ten shares are redeemed in a
  transaction which is properly classified as a
  dividend because a 302(c)(2) waiver of family
  attribution is unavailable?

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