Question

Which of the following statements is false?

A. Redemptions and partial liquidations that qualify as exchanges of the redeemed stock GENERALLY reduce earnings & profits by an amount which does not exceed the rateable share of the corporation's accumulated earnings & profits attributable to ONLY the stock redeemed.
B. If stock redemption proceeds are used to pay either a decedent's estate's funeral & administrative expenses or estate taxes, the redemption proceeds may qualify as a distribution in full payment in exchange for the stock and be taxed at preferential capital gains rates under IRC §303.
C. Only stock included in the decedent's gross estate qualifies for redemption treatment under IRC §303.
D. In order for a stock redemption to be NOT essentially equivalent to a dividend under IRC §302(b)(1), there must be a MATERIAL change in the relative economic interests or rights of the respective shareholders (i.e. a material change in ownership).
E. Only A & B are TRUE.
F. ALL of the above statements are TRUE

Answer 1

Statement D is false; a significant reduction in the shareholder's percentage of ownership and voting power is enough for a stock redemption to qualify as an exchange rather than a dividend.

Step-by-step explanation:

The question pertains to stock redemptions pursuant to the Internal Revenue Code (IRC) and their consequences on taxes. Specifically, it involves IRC § 302 and § 303, which address stock redemptions treated as exchanges and those under estate taxation scenarios, respectively.

Statement D is false because, for a stock redemption to be not essentially equivalent to a dividend under IRC § 302(b)(1), it is not necessary that there be a material change in the relative economic interests or rights of the respective shareholders. In certain situations, a significant reduction in the shareholder's percentage of ownership and voting power is enough to ensure the redemption is treated as an exchange rather than a dividend.