Goose Company is owned equally by Val and her sister Eugenia, each of whom own 500 shares in the company. Val wants to reduce her ownership in the company and have the transaction treated as an exchange for tax purposes. Determine the minimum amount of stock that Goose must redeem from Val for her to treat the redemption as being "substantially disproportionate with respect to the shareholder" and receive exchange treatment.
What will be an ideal response?
167 shares.
Val must reduce her stock ownership in Goose below 40 percent because of the exchange. The algebraic equation to solve for the number of shares to have redeemed is (500 ? X)/(1,000 ? X) < 40 percent, where X equals the number of shares redeemed. Solving for X, the number of shares to be redeemed equals 167. After a redemption of 167 shares, Val will own 333 out of 833 shares of Goose stock. 333/833 = 39.98%, which is below the required 40 percent threshold to have the redemption treated as an exchange for tax purposes.
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