Question

X Corp. has 100 shares of its stock outstanding as follows: Alicia 30 shs.; Barbara 30 shs.; and Charles 40 shs. X Corp.’s E & P = $200,000. X Corp. redeems 20 shares of Charles’s stock for $30,000.

a.	The distribution to Charles is a qualifying redemption because it completely terminates his interest	c.	The distribution is essentially equivalent to a dividend
b.	The distribution is a qualifying redemption because it is substantially disproportionate	d.	None of the above choices

Answer 1

X Corp. has 100 shares of its stock outstanding as follows: Alicia 30 shs.; Barbara 30 shs.; and Charles 40 shs. X Corp.’s E & P = $200,000. X Corp. redeems 20 shares of Charles’s stock for $30,000.

Answer :

b.	The distribution is a qualifying redemption because it is substantially disproportionate

the redemption is substantially diproprtionate

if the sharehoder interet in the outstanding common stock in the redeeming comapnay after redmepion is less than the 80% of interest before redemption

in the given case the post redemption sharehoder interest is less than the 80 % of before redemption interest

80%*40=32 %

post redemption interest is 20/80*100= 25 % which is less than the 32 %