Sam owns 55 percent of the stock of Club Corporation. Unrelated individuals own the remaining 45 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?

Question

Quizplus · Accepted Answer

According to the "substantially disproportionate" test, to be treated as an exchange, the shareholder must own less than 50 percent of the stock after the redemption. As Sam currently owns 55 percent of the stock, he must own less than 50 percent after the redemption, which means he cannot own more than 45 percent of the stock. Therefore, he must redeem at least 10 percent of his stock, leaving him with 45 percent or less, and the remaining unrelated individuals will have more than 50 percent, allowing the redemption to qualify as an exchange. The percentage required for an exchange is less than 50 percent, so answer choices A and D are incorrect.

Sam Owns 55 Percent of the Stock of Club Corporation