Question
Corporation Z is owned entirely by two individuals, C and D. C owns 60 shares of Z common stock bought in one transaction for $1,200.
Corporation Z is owned entirely by two individuals, C and D. C owns 60 shares of Z common stock bought in one transaction for $1,200. D owns 40 shares of Z common stock with a basis of $60 per share. The stocks fair market value is $40 per share. Zs E&P is $1,000.C sells 20 shares to Z for $800. The following statements are with regard to C.
a. | The redemption will be given dividend treatment. | |
b. | The redemption will be given sale or exchange treatment under 302(b)(2), substantially disproportionate disposition. | |
c. | It is impossible to tell whether the transaction will be given sale or dividend treatment. | |
d. | The redemption will most likely be treated as a sale under 302(b)(1), not essentially equivalent to a dividend, since the voting percentage has dropped to 50 percent in a two-person corporation and this is usually sufficient to meet the test. | |
e. | None of the above. |
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