Question

Sara owns 80 percent of the stock of Lea Corporation. Unrelated individuals own the remaining 20 percent. For a stock redemption of Sara's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Lea stock must Sara

own after the redemption?
A) Any percentage less than 64 percent.
B) Any percentage less than 80 percent.
C) Any percentage less than 50 percent.
D) All stock redemptions involving individuals are treated as exchanges.

Answer 1

To meet the 'substantially disproportionate' test, Sara must own less than 50 percent of Lea Corporation's stock after the redemption.

Step-by-step explanation:

For a stock redemption to be treated as an exchange under the 'substantially disproportionate' test, Sara must own less than 50 percent of Lea Corporation's stock after the redemption.

So the correct answer is C) Any percentage less than 50 percent. If Sara were to own exactly 50 percent or more of the stock after the redemption, it would not meet the 'substantially disproportionate' requirement.

It is important to note that this test is used to determine whether the stock redemption can be classified as an exchange for tax purposes, and it has implications on the tax treatment of the transaction.