Question 55. [LO5] Boots, Inc. is owned equally by Frank Albert an

55. [LO5] Boots, Inc. is owned equally by Frank Albert and his daughter Nancy, each of whom held 1,000 shares in the company. Frank wants to retire from the company, and it was decided that the company will redeem all 1,000 of his shares for $25,000 per share on December 31 of this year. Frank’s income tax basis in each share is $500. Boots, Inc. has current E&P of $1,000,000 and accumulated E&P of $5,000,000.

a. What must Frank do to ensure that the redemption will be treated as an exchange?

b. If Frank remained as the Chairman of the Board after the redemption, what is the amount and character (capital gain or dividend) of income that Frank will recognize this year?

c. If Frank treats the redemption as a dividend, what happens to his stock basis in the 1,000 shares redeemed?

56. [LO5] {research} In the previous problem, Nancy would like to have Frank stay on as a consultant after all of his shares are redeemed. She would pay him a modest amount of $500 per month. Nancy wants to know if there is any de minimis rule such that Frank would not be treated as having retained a prohibited interest in the company because he is receiving such a small amount of money. Consult Lynch v. Comm., 801 F.2d 1176 (CA-9 1986), reversing 83 T.C. 597 (1984), Seda, 82 T.C. 484 (1984), and Cerone, 87 T.C. 1 (1986).

57. [LO5] {planning} Limited Brands recently repurchased 68,965,000 of its shares, paying $29 per share. The total number of shares outstanding before the redemption was 473,223,066. The total number of shares outstanding after the redemption was 404,258,066. Assume your client owned 20,000 shares of stock in The Limited. What is the minimum number of shares she must tender to receive exchange treatment under the “substantially disproportionate with respect to the shareholder” change-in-ownership rules?

58. [LO5] Cougar Company is owned equally by Cat Stevens and a partnership that is owned equally by his father and two unrelated individuals. Cat and the partnership each own 3,000 shares in the company. Cat wants to reduce his ownership in the company, and it is decided that the company will redeem 1,500 of his shares for $25,000 per share. Cat’s income tax basis in each share is $5,000. What are the income tax consequences to Cat as a result of the stock redemption, assuming the company has earnings and profits of $10 million?

59. [LO5] {planning} Oriole Corporation, a privately-held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows:

Larry Byrd 400

Paul Byrd (Larry’s son) 200

Lady Byrd (Larry’s daughter) 200

Cal Rifkin (unrelated) 200

Total 1,000

Larry is considering retirement and would like to have the corporation redeem all of his shares for $400,000.

a. What must Larry do or consider if he wants to guarantee that the redemption will be treated as an exchange?

b. Could Larry still act as a consultant to the company and still have the redemption treated as an exchange?

60. [LO5] {research} Using the facts from Problem 60, Oriole Corporation proposes to pay Larry $100,000 and give him an installment note that will pay him $30,000 per year for the next 10 years plus a market rate of interest. Will this arrangement allow Larry to treat the redemption as an exchange? Consult§453(k)(2)(A).