Question

Cyan Corporation (E & P of $700,000) has 4,000 shares of common stock outstanding. The shares are owned as follows: Angelica, 2,000 shares; Dean (Angelica’s son), 1,500 shares; and Walter (Angelica’s uncle), 500 shares. In the current year, Cyan redeems all of Angelica’s shares. Determine whether the redemption can qualify for sale or exchange treatment under the complete termination redemption rules in each of the following independent circumstances.

Answer 1

Answer:

Part - (a)  

Since A constructively holds stock through her son and a prohibited interest within the 10 years of divestment, she will not receive a favorable treatment.

Part - (b)  

The sale may qualify for redemption if A decides to become a creditor within a 10 years period. Creditors do not hold prohibited interest in corporations, typically because they hold no voting rights.

Part - (c)  

The act of replacing, or office held by a family member, does not constitute a prohibited interest. Therefore: the sale should qualify.

Part - (d)  

Accepting the stocks as gift would trigger a prohibited interest. The size of the gift and her son's shares and will nullify the 10 year rule.

Answer 2

Question Continuation

a. Angelica remains as a director of Cyan Corporation.

b. Three years after the redemption, Angelica loans $100,000 to Cyan Corporation and receives in return a two year note receivable.

c. Dean replaces Angelica as president of Cyan Corporation.

d. Six years after the redemption, Angelica receives 250 shares in Cyan as a gift from Walter.

Answer:

A. No

B. Yes

C. Yes

D. No

Explanation:

A.

Angelica won't be treated specially because she will be considered to own 1500 from her son and a interest within 10 years.

B.

A period of 3 years.

Within this 3 years, they'd be considered for redemption depending on Angelica's decision to become a creditor.

C.

The sale would be acceptable because the replacement of an office holder by a family member is not consider as a prohibited interest.

D. The size of the received gift and the shares of Angelica's son will cancel out the 10 year rules.