TAX FILE MEMORANDUM DATE: October 28, 2021 FROM: Marilyn C. Stephenson SUBJECT: Lana Johnson Today I talked to Lana Johnson with respect to her October 21 letter. She is interested in reducing her ownership Interest in Stor Corporation in a stock redemption that would provide her long-term capital gain treatment. Stork Corporation would pay Lana $1,000 for each share of the corporation's stock, the estimated fair market value of the stock. Currently, Stork Corporation has 1,000 shares of stock outstanding owned by the following individuals: Lana Johnson, 400 shares; Lori Jones (your mother), 200 shares; and Leo Jones (your brother), 400 shares. Lana paid $200 per share for the stock eight years ago. She has asked us to determine the minimum number of shares she would have to redeem in order to obtain favorable long-term capital gain treatmem and the overall tax consequences of such a redemption to both her and Stork Corporation. At issue: What is the minimum number of shares that must be redeemed to qualify for sale or exchange treatment for Lana? Wha are the tax consequences to Lana and Stork Corporation upon such a redemption? Conclusion: For purposes of a stock redemption, the shares owned by Lana's mother, Lori, are deemed to be owned by Lana. Thus, Lana is deemed to own % of the Stork Corporation shares prior to any redemption. Using an algebraic formula, it is determined that Lana must redeem a minimum of shares in order to satisfy the 50% and 80% post- redemption ownership tésts of a disproportionate redemption under After the redemption, Lana's ownership interest ( 302(b)(2). both the 50% and 80% tests. The redemption of shares in Stork Corporation would result in The redemption would result in a reduction of Stork Corporation's E & P in the amount of $ to Lana in the amount of $
TAX FILE MEMORANDUM DATE: October 28, 2021 FROM: Marilyn C. Stephenson SUBJECT: Lana Johnson Today I talked to Lana Johnson with respect to her October 21 letter. She is interested in reducing her ownership Interest in Stor Corporation in a stock redemption that would provide her long-term capital gain treatment. Stork Corporation would pay Lana $1,000 for each share of the corporation's stock, the estimated fair market value of the stock. Currently, Stork Corporation has 1,000 shares of stock outstanding owned by the following individuals: Lana Johnson, 400 shares; Lori Jones (your mother), 200 shares; and Leo Jones (your brother), 400 shares. Lana paid $200 per share for the stock eight years ago. She has asked us to determine the minimum number of shares she would have to redeem in order to obtain favorable long-term capital gain treatmem and the overall tax consequences of such a redemption to both her and Stork Corporation. At issue: What is the minimum number of shares that must be redeemed to qualify for sale or exchange treatment for Lana? Wha are the tax consequences to Lana and Stork Corporation upon such a redemption? Conclusion: For purposes of a stock redemption, the shares owned by Lana's mother, Lori, are deemed to be owned by Lana. Thus, Lana is deemed to own % of the Stork Corporation shares prior to any redemption. Using an algebraic formula, it is determined that Lana must redeem a minimum of shares in order to satisfy the 50% and 80% post- redemption ownership tésts of a disproportionate redemption under After the redemption, Lana's ownership interest ( 302(b)(2). both the 50% and 80% tests. The redemption of shares in Stork Corporation would result in The redemption would result in a reduction of Stork Corporation's E & P in the amount of $ to Lana in the amount of $
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Round any computations to the nearest whole number.
TAX FILE MEMORANDUM
DATE: October 28, 2021
FROM: Marilyn C. Stephenson
SUBJECT: Lana Johnson
Today I talked to Lana Johnson with respect to her October 21 letter. She is interested in reducing her ownership interest in Stork
Corporation in a stock redemption that would provide her long-term capital gain treatment. Stork Corporation would pay Lana
$1,000 for each share of the corporation's stock, the estimated fair market value of the stock. Currently, Stork Corporation has
1,000 shares of stock outstanding owned by the following individuals: Lana Johnson, 400 shares; Lori Jones (your mother), 200
shares; and Leo Jones (your brother), 400 shares. Lana paid $200 per share for the stock eight years ago. She has asked us to
determine the minimum number of shares she would have to redeem in order to obtain favorable long-term capital gain treatment
and the overall tax consequences of such a redemption to both her and Stork Corporation.
At issue: What is the minimum number of shares that must be redeemed to qualify for sale or exchange treatment for Lana? What
are the tax consequences to Lana and Stork Corporation upon such a redemption?
Conclusion: For purposes of a stock redemption, the shares owned by Lana's mother, Lori, are deemed to be owned by Lana.
Thus, Lana is deemed to own
% of the Stork Corporation shares prior to any redemption. Using an algebraic
formula, it is determined that Lana must redeem a minimum of
shares in order to satisfy the 50% and 80% post-
redemption ownership tésts of a disproportionate redemption under
After the redemption, Lana's ownership interest (
302(b)(2).
both the 50% and 80% tests.
The redemption of shares in Stork Corporation would result in
The redemption would result in a reduction of Stork Corporation's E & P in the amount of $
to Lana in the amount of $
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