Question

MJJM Inc. has four equal shareholders who are unrelated. Each shareholder owns 300 shares of the common stock of MJJM Inc. representing all of the stock of MJJM Inc. During the taxable year, as part of a single transaction, MJJM Inc. redeemed stock from three of the shareholders. Specifically, MJJM Inc. redeemed 150 shares from Michael, 75 shares from Joseph, and 40 shares from John. The redemption was substantially disproportionate for:

Group of answer choices

Michael and Joseph

Michael and John

Joseph only

Michael only

Answer 1

​​​​​​Answer:

D. Michael only.

Explanation:

Redemption is a process where a company requires its shareholders to sell a portion of their shares to the company and shareholders are liable to sell the shares. MJJM Inc. has four equal shareholders. Each shareholders has 300 shares. The redemption should also be in equal proportionate. A redemption is considered disproportionate if the shareholder owns less than 50 percent of the stock before redemption which is immediately after the redemption. In this case the redemption is substantially disproportionate for Michael as he has to redeem 150 shares out of 300 shares.