Section 4 Substantially Disproportionate Redemptions

• Library: Bus Trans 2005

Under I.R.C. § 302(b)(2), a redemption will receive exchange treatment if all of the following conditions are satisfied:

• The shareholder’s percentage ownership of the outstanding voting stock of the corporation (including all classes that carry voting rights) is reduced immediately after the redemption to less than 80% of the percentage interest in the stock immediately before the redemption

• The shareholder’s percentage ownership of outstanding stock (both voting and nonvoting) is reduced to less than 80% of the percentage ownership before the redemption

• The shareholder owns, immediately after the redemption, less than 50% of the total combined voting power of all classes of stock entitled to vote

The I.R.C. § 302(b)(2) substantially disproportionate test is a mechanical test and is applied on a shareholder-by-shareholder basis. The above three tests are applied immediately before and immediately after the redemption. In determining stock ownership, the...