Question

Sam owns 70 percent of the stock of Club Corporation. Unrelated individuals own the remaining 30 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

Answer 1

Answer: C.Any percentage less than 50 percent

Explanation:

In relation to the law on meeting the criteria to be treated as an exchange under the "substantially disproportionate" test as stipulated by U.S. Code § 302.Distributions in redemption of stock, Sam must own the lesser of 2 options of Club Corporation stock;

1. Less than 50% of the stock after the redemption

2. Less than 80% of Sam's previous ownership percentage

= 80% * 70%

= 56%

The lesser option is that of owning less than 50% so Sam must own less than 50% of stock after the redemption to meet the requirement to be treated as an exchange under the "substantially disproportionate" test.