Adams Inc. Case Study

Adams, Inc. is engaged in family business and has total of six owners, who own shares in the corporation in equal proportion; however, amongst these six owners only one of them is not related to the Adams family; this is Fred Murray. According to the information, Fred Murray is one of the shareholders and wants to sell his stock back to the corporation. His shares have a FMV of $200,000 dollars and a tax basis of $50,000; the redemption is planned for December 31st, which is the end of the year. This paper is going to address about whether the possibility of determining dividend or capital gain form the information provided, the three Internal Revenue Service change in stock ownership test, and the circumstances having constructive ownership …show more content…
The shareholder must hold less than fifty percent total voting power of the all classes of stock in the corporation, and the both ownerships must meet the eighty percent test before and after stock redemption; in addition, it is essential to know the fair market value of the equity holding as a ratio of total outstanding equity that must be less than eighty percent (Giarmarco, 2013). For Fred’s case, the fifty percent test cannot be conducted because the given information in relation to the voting rights of the shareholders before and after the transaction is not provided, which makes it difficult in deciding the distribution is disproportionate or not. Also, the eight prevent may not be applicable to Fred’s case because if he sells all of his shares there is a complete termination of interest rather than partial termination. At last, according to Hoffman, Maloney, Raabe, & Young (2014), a redemption that does not qualify as a disproportionate redemption may still qualify as a not essentially equivalent redemption if it meets the meaningful reduction test. A decrease in the redeeming shareholder’s voting control appears to be the most significant indicator of a meaningful reduction, but reduction in the rights of the shareholders to share in corporate earnings or to receive corporate assets upon liquidation are also considered. However, if the stock redemption results in complete termination of the interest in the Adams Inc, the transaction will be treated as exchange taxable as capital gain. In other words, a redemption that terminates a shareholder’s entire stock ownership in a corporation qualifies for sale or exchange treatment, but this will apply in determining whether the shareholder’s stock ownership has been terminated. For Fred’s case, there is a complete termination of interest in the corporation. However, there was not any given