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Sam owns 70 percent of the stock of Club Corporation. Unrelated individuals own the remaining 30 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?

a) Any percentage less than 70 percentb) Any percentage less than 56 percentc) Any percentage less than 50 percentd) All stock redemptions involving individuals are treated as exchanges.

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Answer:

c) Any percentage less than 50 percent

Explanation:

In order for this redemption to be treated as an exchange under the "substantially disproportionate" test, Sam must own the lesser between 50% of the stock shares and 80% of his original stock share.

If Sam owned 70%, 80% of that would be:

[tex]S = 0.7*0.8=0.56=56\%[/tex]

Since 56% > 50%, then Sam must own less than 50% of Club stock in order for the redemption to be substantially disproportionate

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