Boris owns 60 of the 100 shares outstanding of Bread Corporation stock and 80 of the 100 shares of Butter Corporation stock. His basis in the Bread shares is $10,000 and his basis in his Butter shares is $5,000. Boris sells 30 of his Bread Corporation shares to Butter Corporation for $25,000. Bread Corporation has E&P of $20,000 and Butter Corporation has E&P of $40,000. In applying the

Question

substantially disproportionate test to determine if this is a sale or a dividend, Boris is treated as owning how many shares of Bread after the sale?

A) 30 shares
B) 54 shares
C) 60 shares
D) 80 shares

Answer 1

B) 54 shares

Boris owned 60 shares and sold 30. Since he owns 80% of the corporation that acquired the 30 shares, he is treated as owning 80% of their 30, or 24 shares. He owns in total 54 [(60 - 30) + 24] shares.