Indicate whether the statement is true or false.
The Code treats corporate distributions that are a return
a shareholder’s investment as sales or exchanges
and corporate distributions that are a return
a shareholder’s investment as dividends.
For tax purposes, all stock redemptions are treated as dividend distributions.
Noncorporate shareholders generally prefer a nonqualified stock redemption over a qualifying stock
redemption due to the availability of the dividends received deduction.
A shareholder’s basis in property received in a stock redemption is the property’s fair market value.
A shareholder’s holding period of property acquired in a stock redemption begins on the date of the
Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the
parties that clearly identified the transaction as a stock redemption (and not a dividend distribution).
agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to
In applying the stock attribution rules to a stock redemption, stock owned by a shareholder who owns 65% of
a corporation is deemed to be owned in full by the corporation.
In a not essentially equivalent redemption [§ 302(b)(1)], the
meaningful reduction test
is an objective safe
harbor rule that taxpayers can rely upon for sale or exchange treatment.
As a result of a redemption, a shareholder’s interest (direct and indirect) in the corporation decreased from
58% to 45%.
The redemption qualifies for sale or exchange treatment as a disproportionate redemption.
Puffin Corporation’s 2,000 shares outstanding are owned as follows: Paul, 800 shares; Sandra (Paul’s sister),
800 shares; and Greta (Paul’s granddaughter), 400 shares. During the current year, Puffin (E & P of $1
million) redeemed 600 shares of Paul’s stock for $100,000. If Paul had acquired the 600 shares five years ago
for $30,000, he will have a long-term capital gain of $70,000 from the redemption.
Sally and her mother are the sole shareholders of Owl Corporation.
During the current year, Owl distributes
cash in redemption of all of Sally’s stock.
Sally continues to be employed as controller for Owl after the
The distribution is a complete termination redemption resulting in sale or exchange treatment for
Reginald and Roland (Reginald’s son) each own 50% of the stock of Robin Corporation. Reginald’s stock
interest is entirely redeemed by Robin Corporation. Two years later, Reginald loans Robin Corporation
$250,000. The loan to Robin Corporation constitutes a prohibited interest for purposes of the family