Question

Sam owns 65 percent of the stock of Club Corporation. Unrelated individuals own the remaining 35 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption? Multiple Choice a. Any percentage less than 65 percent b. Any percentage less than 52 percent c. All stock redemptions involving individuals are treated as exchanges d. Any percentage less than 50 percent

Answer 1

d. Any percentage less than 50 percent

Step-by-step explanation:

After a stock redemption, in order for an exchange to be considered "substantially disproportionate", the majority shareholder's new position must be less than the lesser between 80% of their original share of the stock and 50% (lose control of the company).

If Sam originally had 65%, 80% of his original share is:

`0.65*0.80 =0.52= 52\%`

Since 50% < 52%, Sam must own any percentage less than 50 percent for it to be treated as an exchange under the "substantially disproportionate" test.