Adams, Inc. Case Study

1363 Words 5 Pages
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…
When there are changes in stock ownership, the rules must follow and the three changes in stock ownership test may determine whether the change is taxable as capital gain or taxable as dividend. First, redemption is not necessarily equal to dividend because the redemption of stock cannot be taken as amounting to distribution of dividend; there must be reduction in ownership in the corporation. For Fred’s case, when he sells his shares, there may be total termination of interest in the corporation rather than the partial sale of interest. However, there was no relevant information was provided whether Fred keep his ability to control the corporation. For example, sale of forty percent stake results in reduction of control form sixty to forty prevent in a substantial reduction in ownership to qualify the exchange as sale. According to Cornell University Law School (2004), a corporation satisfies when the stock ownership owned more than 50 percent of the value of its outstanding shares, and shareholder may be qualified shareholder with respect to one category of income while not being a qualified shareholder with respect to another, and a …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

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