For a redemption to be substantially disproportionate, the shareholder must own less than what percentage of the voting power after the redemption?
Understand the Problem
The question is asking about the requirements for a stock redemption to be considered "substantially disproportionate" under US tax law, specifically focusing on the percentage of voting power a shareholder can own after the redemption.
Answer
50%
For a redemption to be substantially disproportionate, the shareholder must own less than 50% of the voting power after the redemption.
Answer for screen readers
For a redemption to be substantially disproportionate, the shareholder must own less than 50% of the voting power after the redemption.
More Information
A stock redemption is when a company buys back its own shares from a shareholder. This can have tax implications for the shareholder, and whether it is treated as a sale of stock or a dividend depends on whether it qualifies as a substantially disproportionate redemption under IRS guidelines.
Tips
It's easy to confuse the 50% ownership rule with the 80% rule regarding the shareholder's ownership percentage before and after the redemption. Remember the shareholder must own less than 50% of the voting stock after the redemption to meet the first requirement of a substantially disproportionate redemption.
Sources
- Rev. Rul. 81-41 - Tax Notes - taxnotes.com
- If a stock redemption occurs is this - UH Law Center - law.uh.edu
- EXCHANGE TREATED AS SUBSTANTIALLY ... - Tax Notes - taxnotes.com
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