Which of the following conditions would qualify a stock redemption as a sale, rather than dividend, treatment?
Understand the Problem
The question is asking about the conditions under which a stock redemption is treated as a sale rather than a dividend for tax purposes. This distinction is important because sale treatment typically results in capital gains or losses, while dividend treatment is often taxed as ordinary income.
Answer
A stock redemption is treated as a sale if it's not equivalent to a dividend, is substantially disproportionate, or completely terminates the shareholder's interest.
A stock redemption qualifies as a sale, rather than a dividend, if it is not essentially equivalent to a dividend, is substantially disproportionate with respect to the shareholder's stock, or is a complete termination of the shareholder's interest.
Answer for screen readers
A stock redemption qualifies as a sale, rather than a dividend, if it is not essentially equivalent to a dividend, is substantially disproportionate with respect to the shareholder's stock, or is a complete termination of the shareholder's interest.
More Information
The conditions that qualify a stock redemption as a "sale" rather than dividend treatment are outlined in Section 302 of the Internal Revenue Code.
Tips
It is important to consider all factors to determine if the redemption qualifies for sale treatment. For example, consider the shareholder's ownership percentage before and after the redemption, and whether the redemption results in a meaningful reduction of the shareholder's interest in the corporation.
Sources
- If a stock redemption occurs is this - UH Law Center - law.uh.edu
- S corporation redemptions: Navigating Secs. 302 and 301 - thetaxadviser.com
- Stock redemption: Capital gain or ordinary income? - The Tax Adviser - thetaxadviser.com
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