Mr.Smooth owns directly 70 percent of the stock of Mellow Corporation and 60 percent of the stock of Calm Corporation.Mellow owns 30 percent of Calm.During the year, Calm redeemed all 60 percent of Mr.Smooth's stock.Mr.Smooth may waive the constructive ownership rules and secure sale treatment for the redemption.

Question

Quizplus · Accepted Answer

Mr.Smooth's direct ownership in Calm Corporation was 60%, but when combined with Mellow Corporation's 30% ownership in Calm, his constructive ownership was actually 78% (60% + 70% * 30%). Since he owned more than 50% of Calm, the redemption would likely be treated as a dividend rather than a sale, and he would not be able to waive the constructive ownership rules.

MrSmooth Owns Directly 70 Percent of the Stock of Mellow