Question

Almonds, Inc. redeems 25 shares of Lucy's common stock in exchange for $10,000, dropping her ownership from 40 shares to 15. There is only one class of stock and 100 shares were outstanding prior to the redemption. Is Lucy's redemption substantially disproportionate?

Answer 1

Lucy's stock redemption does not meet the criteria for being substantially disproportionate without further details regarding the total combined voting power and exact proportional reduction after the redemption.

Step-by-step explanation:

Lucy's redemption is not substantially disproportionate. For a redemption to be considered substantially disproportionate, a shareholder must pass certain tests after the redemption. According to Internal Revenue Code (IRC) section 302(b)(2), the shareholder must own less than 50% of the total combined voting power of the corporation, and the shareholder's percentage ownership of voting stock must decrease by at least 20% of their relative stock ownership before the redemption.

Prior to the redemption, Lucy owned 40% (40 out of 100 shares) and after the redemption, she owned 15%, thereby reducing her proportion of ownership. However, in this specific query, there are not enough details provided to determine if the 50% and 20% tests are met because we do not have information about the total combined voting power of all stock after the redemption, nor the precise proportional reduction.