Van owns all 1,000 shares of Valley Metal Corporation stock. The stock has a $100,000 FMV. Karen wants to purchase the stock from Van but has only $70,000. Valley Metal has ample cash, which is not needed for operations. Which of the following best qualifies for bootstrap redemption treatment and no constructive dividends to the purchaser?

Question

Quizplus · Accepted Answer

Bootstrap redemption treatment allows the shareholder to redeem their shares without triggering constructive dividends to the purchaser. In this case, option A involves the use of corporate funds to pay the installment obligations, which could be construed as a constructive dividend. Option C involves a contract to buy the remaining shares, which creates an implicit obligation on the part of the corporation to redeem those shares, which could also trigger constructive dividends. Option D involves the use of an option, which could be seen as a financial arrangement rather than a bona fide sale of stock, and therefore could trigger constructive dividends. Option B, however, involves a direct sale of 70 shares from Van to Karen, and then a redemption of Van's remaining shares for a fixed price that is not dependent on the installation of any financial arrangements. Therefore, option B is the most likely to qualify for bootstrap redemption treatment and not trigger constructive dividends.

Van Owns All 1,000 Shares of Valley Metal Corporation Stock