111 ACCY 272 Session 07 Chapter 5 (A,B,C) REDEMPTIONS AND PARTIAL LIQUIDATIONS (1) Text (Lind [6e]), pp Problems, pp. 213, , , Cases, pp [Lynch], [Davis]LynchDavis Revenue Rulings, pp [RR 85-14], pp [RR ]RR 85-14RR pp [RR ], pp [RR ]RR RR by Hugh Pforsich

222 A.Introduction [ ]Introduction B.Constructive Ownership of Stock [ ]Constructive Ownership of Stock Problems [213] Problems C.Redemptions Tested at the Shareholder Level [ ]Redemptions Tested at the Shareholder Level 1.Substantially Disproportionate Redemptions [ ]Substantially Disproportionate Redemptions Revenue Ruling [ ] Revenue Ruling Problems [ ] Problems 2.Complete Termination of a Shareholder’s Interest [ ]Complete Termination of a Shareholder’s Interest a.Waiver of Family Attribution [ ]Waiver of Family Attribution Case: Lynch v. Commissioner [ ] Case: Lynch v. Commissioner Revenue Ruling [ ] Revenue Ruling Revenue Ruling [ ] Revenue Ruling NoteNote [ ] b.Corporate Gain or Loss [ ]Corporate Gain or Loss Problems [ ] Problems 3.Redemptions Not Essentially Equivalent to a Dividend [ ]Redemptions Not Essentially Equivalent to a Dividend Case: United States v. Davis [ ] Case: United States v. Davis Revenue Ruling [ ] Revenue Ruling NoteNote [ ] Problems [ ] Problems Chapter 5 [ ] – Table of Contents

3 A. Introduction [ ]

4 B. Constructive Ownership of Stock [ ]

5 B. Constructive Ownership of Stock [ ] Problems [213] 1. Wham Corporation has 100 shares of common stock outstanding. Twenty-five shares are owned by Grandfather, 20 shares are owned by Mother (Grandfather's Daughter), 15 shares are owned by Mother's Daughter, 10 shares are owned by Mother's adopted Son, and the remaining 30 shares are owned by Grandmother's estate, of which Mother is a 50% beneficiary. One of Mother's cousins is the other beneficiary of the estate. Mother also has an option to purchase 5 of Son's shares. How much Wham stock do Grandfather, Mother's Daughter and Grandmother's estate own after application of §318?

6 B. Constructive Ownership of Stock [ ] Problems [213] 2.All the 100 shares of Xerxes Corporation are owned by Partnership, in which A, B, C and D (all unrelated to each other) are equal partners. W, A's wife, owns all of the 100 shares of Yancy Corporation. (a) How many shares, if any, of Xerxes Corporation are owned by A, W, and M (W's mother)? (b) How many shares, if any, of Xerxes are owned by Yancy? Would Yancy constructively own any shares of Xerxes if W owned only 10 percent of Yancy? (c) How many shares, if any, of Yancy are owned by Partnership, B, C, D and Xerxes?

7 B. Constructive Ownership of Stock [ ] Problems [213] 2. All the 100 shares of Xerxes Corporation are owned by Partnership, in which A, B, C and D (all unrelated to each other) are equal partners. W, A's wife, owns all of the 100 shares of Yancy Corporation. (a) How many shares, if any, of Xerxes Corporation are owned by A, W, and M (W's mother)?

8 B. Constructive Ownership of Stock [ ] Problems [213] 2. All the 100 shares of Xerxes Corporation are owned by Partnership, in which A, B, C and D (all unrelated to each other) are equal partners. W, A's wife, owns all of the 100 shares of Yancy Corporation. (b) How many shares, if any, of Xerxes are owned by Yancy? Would Yancy constructively own any shares of Xerxes if W owned only 10 percent of Yancy?

9 B. Constructive Ownership of Stock [ ] Problems [213] 2. All the 100 shares of Xerxes Corporation are owned by Partnership, in which A, B, C and D (all unrelated to each other) are equal partners. W, A's wife, owns all of the 100 shares of Yancy Corporation. (c) How many shares, if any, of Yancy are owned by Partnership, B, C, D and Xerxes?

10 C. Redemptions Tested at the Shareholder Level [ ]

11 C. Redemptions Tested at the Shareholder Level [ ] 1. Substantially Disproportionate Redemptions [ ]

12 C. Redemptions Tested at the Shareholder Level [ ] 1. Substantially Disproportionate Redemptions [ ] Revenue Ruling [ ]

13 C. Redemptions Tested at the Shareholder Level [ ] 1. Substantially Disproportionate Redemptions [ ] Problems [ ] 1. Y Corporation has 100 shares of common stock and 200 shares of nonvoting preferred stock outstanding. Alice owns 80 shares of Y common stock and 100 shares of its preferred stock. Cathy owns the remaining 20 shares of Y common and 100 shares of Y preferred stock. Alice and Cathy are not related. In each of the following alternative situations, determine whether the redemption satisfies the requirements of §302(b)(2): (a) On January 15, Y Corporation redeems 75 of Alice's preferred shares. (b) Same as (a), above, except that Y also redeems 60 shares of Alice's common stock. (c) Same as (a), above, except that Y also redeems 70 shares of Alice's common stock. (d) What difference would it make in (c), above, if, on December 1 of the same year, Y redeems 10 shares of Cathy's common stock?

14 C. Redemptions Tested at the Shareholder Level [ ] 1. Substantially Disproportionate Redemptions [ ] Problems [ ] 1. Y Corporation has 100 shares of common stock and 200 shares of nonvoting preferred stock outstanding. Alice owns 80 shares of Y common stock and 100 shares of its preferred stock. Cathy owns the remaining 20 shares of Y common and 100 shares of Y preferred stock. Alice and Cathy are not related. In each of the following alternative situations, determine whether the redemption satisfies the requirements of §302(b)(2): (a) On January 15, Y Corporation redeems 75 of Alice's preferred shares.

15 C. Redemptions Tested at the Shareholder Level [ ] 1. Substantially Disproportionate Redemptions [ ] Problems [ ] 1. Y Corporation has 100 shares of common stock and 200 shares of nonvoting preferred stock outstanding. Alice owns 80 shares of Y common stock and 100 shares of its preferred stock. Cathy owns the remaining 20 shares of Y common and 100 shares of Y preferred stock. Alice and Cathy are not related. In each of the following alternative situations, determine whether the redemption satisfies the requirements of §302(b)(2): (b) Same as (a), above, except that Y also redeems 60 shares of Alice's common stock.

16 C. Redemptions Tested at the Shareholder Level [ ] 1. Substantially Disproportionate Redemptions [ ] Problems [ ] 1. Y Corporation has 100 shares of common stock and 200 shares of nonvoting preferred stock outstanding. Alice owns 80 shares of Y common stock and 100 shares of its preferred stock. Cathy owns the remaining 20 shares of Y common and 100 shares of Y preferred stock. Alice and Cathy are not related. In each of the following alternative situations, determine whether the redemption satisfies the requirements of §302(b)(2): (c) Same as (a), above, except that Y also redeems 70 shares of Alice's common stock.

17 C. Redemptions Tested at the Shareholder Level [ ] 1. Substantially Disproportionate Redemptions [ ] Problems [ ] 1. Y Corporation has 100 shares of common stock and 200 shares of nonvoting preferred stock outstanding. Alice owns 80 shares of Y common stock and 100 shares of its preferred stock. Cathy owns the remaining 20 shares of Y common and 100 shares of Y preferred stock. Alice and Cathy are not related. In each of the following alternative situations, determine whether the redemption satisfies the requirements of §302(b)(2): (d) What difference would it make in (c), above, if, on December 1 of the same year, Y redeems 10 shares of Cathy's common stock?

18 C. Redemptions Tested at the Shareholder Level [ ] 1. Substantially Disproportionate Redemptions [ ] Problems [ ] 2. Z Corporation has 100 shares of voting common stock and 200 shares of nonvoting common stock outstanding. Every share of Z common stock has a fair market value of $100. Don owns 60 shares of Z voting common stock and 100 shares of Z nonvoting common stock. Jerry owns all of the remaining Z stock. Don and Jerry are not related to one another. If Z redeems 30 of Don's voting common shares, will the redemption qualify for exchange treatment under §302(b)(2)?

19 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ]

20 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] a. Waiver of Family Attribution [ ]

21 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] a. Waiver of Family Attribution [ ] Case: Lynch v. Commissioner [ ] Code: Issues: Facts & Analysis: Holding:

22 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] a. Waiver of Family Attribution [ ] Revenue Ruling [ ]

23 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] a. Waiver of Family Attribution [ ] Revenue Ruling [ ]

24 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] a. Waiver of Family Attribution [ ] Note [ ]

25 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ]

26 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 1. Randall Corporation is owned by John, John's daughter Alison and Alison's son Chuck. John owns 100 shares of Randall stock, Alison owns 50 shares and Chuck owns 25 shares. Consider whether the following redemptions (in year one) qualify as an exchange under § 302(b)(3): (a) Randall redeems Alison's entire 50 shares for cash. (b) Same as (a), above, except that Alison fails to file the agreement required in §302(c)(2)(A)(iii)? What is the purpose of this requirement? (c) Same as (a), above, except the price paid for Alison's shares is contingent upon Randall's future profits? (d) Randall redeems 20 of Alison's shares for cash on January 1 of year one and the remaining 30 shares for cash on January 1 of year two. (e) Same as (a), above, except Alison remains as a director of Randall? (f) Same as (a), above, except that, two years after the redemption, Randall forms a new subsidiary and Alison becomes an employee of the subsidiary? (g) Same as (a), above, except that two years after the redemption Chuck dies and leaves his Randall shares to Alison?

27 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 1. Randall Corporation is owned by John, John's daughter Alison and Alison's son Chuck. John owns 100 shares of Randall stock, Alison owns 50 shares and Chuck owns 25 shares. Consider whether the following redemptions (in year one) qualify as an exchange under § 302(b)(3): (a) Randall redeems Alison's entire 50 shares for cash.

28 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 1. Randall Corporation is owned by John, John's daughter Alison and Alison's son Chuck. John owns 100 shares of Randall stock, Alison owns 50 shares and Chuck owns 25 shares. Consider whether the following redemptions (in year one) qualify as an exchange under § 302(b)(3): (b) Same as (a), above, except that Alison fails to file the agreement required in §302(c)(2)(A)(iii)? What is the purpose of this requirement?

29 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 1. Randall Corporation is owned by John, John's daughter Alison and Alison's son Chuck. John owns 100 shares of Randall stock, Alison owns 50 shares and Chuck owns 25 shares. Consider whether the following redemptions (in year one) qualify as an exchange under § 302(b)(3): (c) Same as (a), above, except the price paid for Alison's shares is contingent upon Randall's future profits?

30 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 1. Randall Corporation is owned by John, John's daughter Alison and Alison's son Chuck. John owns 100 shares of Randall stock, Alison owns 50 shares and Chuck owns 25 shares. Consider whether the following redemptions (in year one) qualify as an exchange under § 302(b)(3): (d) Randall redeems 20 of Alison's shares for cash on January 1 of year one and the remaining 30 shares for cash on January 1 of year two.

31 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 1. Randall Corporation is owned by John, John's daughter Alison and Alison's son Chuck. John owns 100 shares of Randall stock, Alison owns 50 shares and Chuck owns 25 shares. Consider whether the following redemptions (in year one) qualify as an exchange under § 302(b)(3): (e) Same as (a), above, except Alison remains as a director of Randall?

32 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 1. Randall Corporation is owned by John, John's daughter Alison and Alison's son Chuck. John owns 100 shares of Randall stock, Alison owns 50 shares and Chuck owns 25 shares. Consider whether the following redemptions (in year one) qualify as an exchange under § 302(b)(3): (f) Same as (a), above, except that, two years after the redemption, Randall forms a new subsidiary and Alison becomes an employee of the subsidiary?

33 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 1. Randall Corporation is owned by John, John's daughter Alison and Alison's son Chuck. John owns 100 shares of Randall stock, Alison owns 50 shares and Chuck owns 25 shares. Consider whether the following redemptions (in year one) qualify as an exchange under § 302(b)(3): (g) Same as (a), above, except that two years after the redemption Chuck dies and leaves his Randall shares to Alison?

34 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 2. The B & B Windshield Wiper Corporation ("B & B") was organized ten years ago by Betty and Billy, who are wife and husband. Betty and Billy formed B & B by transferring cash and other property to the C in exchange for 150 shares of the C's common stock. Betty and Billy own B & B's manufacturing plant and lease the plant to the C for an annual rental fee. B & B has been very successful and has a large amount of accumulated earnings and profits. Five years ago, Betty and Billy's youngest Son, Junior, began working for B & B as a clerk in the domestic subcompact wiper division. Junior's managerial talents were quickly recognized and he has risen rapidly in B & B's corporate structure. Today, Junior is B & B's Vice President in charge of operations and has overall responsibility for production at B & B's manufacturing plant. Shortly after Junior came to B & B, his parents agreed that he would eventually take over control and management of the company. Betty and Billy have now decided that the time has come to retire. To implement this decision, their accountant has suggested the following plan: (1) Betty and Billy will give 30 of their 150 B & B shares to Junior to provide him with an ownership interest in the C. (2) B & B will redeem Betty and Billy's remaining 120 shares for $50,000 plus a $400,000 B & B note paying market rate interest. The note will be payable monthly over a 20-year term and will be secured by an interest in the C's assets. Additionally, B & B will agree to restrict dividend payments, limit new indebtedness, and refrain from taking certain extraordinary corporate action (e.g., merger or liquidation) during the term of the note. (3) Betty and Billy will continue to lease the manufacturing plant to B & B under a lease which has a rent escalation clause dependent upon the consumer price index. They also will grant B & B a five year option to purchase the plant at its appraised fair market value. (a) Will Betty and Billy's redemption be classified as an exchange under §302(a)?(b) (b) Suppose Betty establishes a management consulting firm after leaving B & B. What would be the tax impact on the redemption if B & B hired Betty's firm to perform an analysis of its proposed entry into the Australian windshield wiper market?

35 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 2. (a) Will Betty and Billy's redemption be classified as an exchange under §302(a)?(b) (b) Suppose Betty establishes a management consulting firm after leaving B & B. What would be the tax impact on the redemption if B & B hired Betty's firm to perform an analysis of its proposed entry into the Australian windshield wiper market?

36 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 3. Cinelab Corporation has 100 shares of common stock outstanding. John owns 50 shares and Mary, John's sister, owns 30 shares. The other 20 shares are owned by the Estate of Sam; Sam was John and Mary's father. Their mother, Bella, is the sole beneficiary of the estate. Consider the tax consequences of the following redemptions of Cinelab stock: (a) Cinelab redeems Estate's 20 shares. (b) Same as (a), above, except that Bella is the residuary beneficiary of the estate and John and Mary each receive specific legacies. (c) Same as (a), above, except that John and Mary are the residuary beneficiaries of the estate. (d) Same as (a), above, except the 20 shares were owned and redeemed from a trust established under Sam's will providing income to Bella for her life and the remainder to Nancy, another child of Sam and Bella. The life estate and remainder have equal actuarial values. (e) Any change in the result in (d), above, if Nancy acquires stock in Cinelab three years after the redemption by the trust?

37 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 3. Cinelab Corporation has 100 shares of common stock outstanding. John owns 50 shares and Mary, John's sister, owns 30 shares. The other 20 shares are owned by the Estate of Sam; Sam was John and Mary's father. Their mother, Bella, is the sole beneficiary of the estate. Consider the tax consequences of the following redemptions of Cinelab stock: (a) Cinelab redeems Estate's 20 shares.

38 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 3. Cinelab Corporation has 100 shares of common stock outstanding. John owns 50 shares and Mary, John's sister, owns 30 shares. The other 20 shares are owned by the Estate of Sam; Sam was John and Mary's father. Their mother, Bella, is the sole beneficiary of the estate. Consider the tax consequences of the following redemptions of Cinelab stock: (b) Same as (a), above, except that Bella is the residuary beneficiary of the estate and John and Mary each receive specific legacies.

39 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 3. Cinelab Corporation has 100 shares of common stock outstanding. John owns 50 shares and Mary, John's sister, owns 30 shares. The other 20 shares are owned by the Estate of Sam; Sam was John and Mary's father. Their mother, Bella, is the sole beneficiary of the estate. Consider the tax consequences of the following redemptions of Cinelab stock: (c) Same as (a), above, except that John and Mary are the residuary beneficiaries of the estate.

40 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 3. Cinelab Corporation has 100 shares of common stock outstanding. John owns 50 shares and Mary, John's sister, owns 30 shares. The other 20 shares are owned by the Estate of Sam; Sam was John and Mary's father. Their mother, Bella, is the sole beneficiary of the estate. Consider the tax consequences of the following redemptions of Cinelab stock: (d) Same as (a), above, except the 20 shares were owned and redeemed from a trust established under Sam's will providing income to Bella for her life and the remainder to Nancy, another child of Sam and Bella. The life estate and remainder have equal actuarial values.

41 C. Redemptions Tested at the Shareholder Level [ ] 2. Complete Termination of a Shareholder’s Interest [ ] b. Corporate Gain or Loss [ ] Problems [ ] 3. Cinelab Corporation has 100 shares of common stock outstanding. John owns 50 shares and Mary, John's sister, owns 30 shares. The other 20 shares are owned by the Estate of Sam; Sam was John and Mary's father. Their mother, Bella, is the sole beneficiary of the estate. Consider the tax consequences of the following redemptions of Cinelab stock: (e) Any change in the result in (d), above, if Nancy acquires stock in Cinelab three years after the redemption by the trust?

42 C. Redemptions Tested at the Shareholder Level [ ] 3. Redemptions Not Essentially Equivalent to a Dividend [ ]

43 C. Redemptions Tested at the Shareholder Level [ ] 3. Redemptions Not Essentially Equivalent to a Dividend [ ] Case: United States v. Davis [ ] Code: Issues: Facts & Analysis: Holding:

44 C. Redemptions Tested at the Shareholder Level [ ] 3. Redemptions Not Essentially Equivalent to a Dividend [ ] Revenue Ruling [ ]

45 C. Redemptions Tested at the Shareholder Level [ ] 3. Redemptions Not Essentially Equivalent to a Dividend [ ] Note [ ]

46 C. Redemptions Tested at the Shareholder Level [ ] 3. Redemptions Not Essentially Equivalent to a Dividend [ ] Problems [ ] 1. Z Corporation has 100 shares of common stock outstanding, owned by A (28 shares), B (25 shares), C (23 shares) and D (24 shares.) Unless otherwise indicated, assume the SHs are not related. In each of the following alternative situations, determine whether the redemption is not essentially equivalent to a dividend under §302(b)(1): (a) Z redeems 7 shares from A (b) Z redeems 5 shares from A, and A and D are mother and daughter. (c) Z redeems 5 shares from A, and A and B are mother and daughter. (d) Same as (c), above, except that A has not spoken to B since B married "outside her faith."

47 C. Redemptions Tested at the Shareholder Level [ ] 3. Redemptions Not Essentially Equivalent to a Dividend [ ] Problems [ ] 1. Z Corporation has 100 shares of common stock outstanding, owned by A (28 shares), B (25 shares), C (23 shares) and D (24 shares.) Unless otherwise indicated, assume the SHs are not related. In each of the following alternative situations, determine whether the redemption is not essentially equivalent to a dividend under §302(b)(1): (a) Z redeems 7 shares from A

48 C. Redemptions Tested at the Shareholder Level [ ] 3. Redemptions Not Essentially Equivalent to a Dividend [ ] Problems [ ] 1. Z Corporation has 100 shares of common stock outstanding, owned by A (28 shares), B (25 shares), C (23 shares) and D (24 shares.) Unless otherwise indicated, assume the SHs are not related. In each of the following alternative situations, determine whether the redemption is not essentially equivalent to a dividend under §302(b)(1): (b) Z redeems 5 shares from A, and A and D are mother and daughter.

49 C. Redemptions Tested at the Shareholder Level [ ] 3. Redemptions Not Essentially Equivalent to a Dividend [ ] Problems [ ] 1. Z Corporation has 100 shares of common stock outstanding, owned by A (28 shares), B (25 shares), C (23 shares) and D (24 shares.) Unless otherwise indicated, assume the SHs are not related. In each of the following alternative situations, determine whether the redemption is not essentially equivalent to a dividend under §302(b)(1): (c) Z redeems 5 shares from A, and A and B are mother and daughter.

50 C. Redemptions Tested at the Shareholder Level [ ] 3. Redemptions Not Essentially Equivalent to a Dividend [ ] Problems [ ] 1. Z Corporation has 100 shares of common stock outstanding, owned by A (28 shares), B (25 shares), C (23 shares) and D (24 shares.) Unless otherwise indicated, assume the SHs are not related. In each of the following alternative situations, determine whether the redemption is not essentially equivalent to a dividend under §302(b)(1): (d) Same as (c), above, except that A has not spoken to B since B married "outside her faith."

51 C. Redemptions Tested at the Shareholder Level [ ] 3. Redemptions Not Essentially Equivalent to a Dividend [ ] Problems [ ] 2. Y Corporation has 100 shares of common stock and 100 shares of nonvoting preferred stock outstanding. The preferred stock is not convert­ible into Y common stock and is not §306 stock (i.e., not stock treated specially in §306 because of its tax avoidance potential). The Y common and preferred stock are owned by the following unrelated SHs: SHCSPS A400 B2055 C2515 D1515 E020 Will the following alternative redemptions qualify for exchange treatment under §302(b)? (a) Y redeems 5 preferred shares from E. (b) Y redeems all of its outstanding preferred stock.

52 C. Redemptions Tested at the Shareholder Level [ ] 3. Redemptions Not Essentially Equivalent to a Dividend [ ] Problems [ ] 3.Suppose an individual SH owns ten shares of common stock with a basis of $15,000. What happens to the SH's basis if five shares are redeemed in a transaction which is properly classified as a dividend? What if all ten shares are redeemed in a transaction which is properly classified as a dividend because a §302(c)(2) waiver of family attribution is unavailable?