Boris owns 60 of the 100 shares outstanding of Bread Corporation stock and 80 of the 100 shares of Butter Corporation stock. His basis in the Bread shares is $10,000 and his basis in his Butter shares is $5,000. Boris sells 30 of his Bread Corporation shares to Butter Corporation for $25,000. Bread Corporation has E&P of $20,000 and Butter Corporation has E&P of $40,000. In applying the substantially disproportionate test to determine if this is a sale or a dividend, Boris is treated as owning how many shares of Bread after the sale?

Question

Quizplus · Accepted Answer

To apply the substantially disproportionate test, the shareholder must own less than 50% of the outstanding stock after the transaction. 
Boris owns 60 out of 100 shares of Bread Corporation, which is 60% of the outstanding stock. 
After selling 30 shares to Butter Corporation, Boris will own 30 out of 70 shares of Bread Corporation, which is 42.86% of the outstanding stock. 
Since Boris will own less than 50% of the outstanding stock of Bread Corporation after the sale, the transaction will be treated as a sale rather than a dividend.

Boris Owns 60 of the 100 Shares Outstanding of Bread