In short
A stock redemption is a corporation buying back its own shares from a shareholder. It is treated as a sale (capital gain or loss) if it meets one of the tests in Section 302; otherwise it is a distribution, taxed as a dividend to the extent of earnings and profits.
Key takeaways
- Sale treatment applies to redemptions that are substantially disproportionate, completely end the shareholder's interest or are not essentially equivalent to a dividend.
- Substantially disproportionate: after the redemption the shareholder owns less than 50% and less than 80% of their former percentage.
- Ownership by family members and related entities is attributed to the shareholder when applying the tests.
Where it's tested
TCP: Distributions, Redemptions & Liquidations — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A shareholder owns 70% of a corporation's stock. Following a redemption, she owns 52%. Ignoring attribution, does the redemption qualify as substantially disproportionate?