[Aldialdr]

Hi,

So I’ve been trying to get my head around the concept of substantially disproportionate redemption of shares. I know of the 50% and 80% rules, but I have no clue how to workout the calculations and answer the questions.

It’d be great if anyone could ELI5 how to work out the questions.

Here are some questions from Gleim:

QUESTION #1:

Mary, an individual shareholder, owns 125 shares of West Corporation. West Corporation has 500 shares of common stock outstanding. If West Corporation redeems 100 shares of common stock from its shareholders, what is the least number of Mary’s shares that will need to be redeemed in order for the redemption to be substantially disproportionate to Mary?

CHOICES: A. 46, B. 80, C. 10, D. 45

QUESTION #2:

Mr. Oleaner owns 600 shares of the voting stock of Clarkson Corporation. The remaining 350 shares of the voting stock outstanding are held by persons unrelated to Mr. Oleaner. Mr. Oleaner wants a proposed redemption of part of the stock to qualify under IRC Sec. 302(b)(2). What is the maximum number of shares that Mr. Oleaner can own after the redemption to qualify as a sale or an exchange?

CHOICES: A. None of the answers are correct. B. 300, C. 479, D. 349

QUESTION #3

Bob owns 250 shares of Rice Corporation. Rice Corporation plans on redeeming 100 shares of its 500 shares of common stock outstanding. Below what percentage must Bob’s interest be reduced if the redemption is to be substantially disproportionate?

CHOICES: A. 40%, B. 50%, C. 20%, D. 60%

Thanks!

[tuanxn]

Question 1:
Mary currently owns 25% of West Corporation, which means she must own less than 20% (80% of 25%) after the redemption for it to qualify as a redemption. If 100 total shares are redeemed, the new total amount of shares outstanding for West is 400 shares. 20% of 400 shares is 80 shares, so Mary needs to redeem 46 shares to be under the 80% threshold.

Question 2:
Mr. Cleaner currently owns 600 out of 950 shares, or 63.15%. He needs to own less than 50% afterwards so that it will be a qualified redemption. Since the other party owns 350 shares, the most he can own after the redemption is 349 (1 share less than 50%).

Question 3:
Bob owns 50% before the redemption, he needs to own less than 50% after.

Basically if you own 50% or more before the redemption, you need to own less than 50% after the redemption.
If you own less than 50% before the redemption (say 40%), then you need to own less than 80% of that percentage after the redemption. So if you owned 40% before the redemption, you need to own less than 32% after the redemption (40% x 80%).

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