Sara owns 60 percent of the stock of Lea Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption of Sara's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Lea stock must Sara own after the redemption?

Question

Quizplus · Accepted Answer

To meet the substantially disproportionate test, the shareholder must own less than 50% of the voting power, distribution rights and liquidation proceeds after the redemption. Since Sara currently owns 60% of the stock, she must redeem enough shares to reduce her ownership to less than 50%. Therefore, she must own no more than 48% of the stock after the redemption.

Sara Owns 60 Percent of the Stock of Lea Corporation