Note that this is the interest owned beforehand,
not an ownership percentage.
And condition two, after the redemption,
the shareholder owns less than 50 percent of
the total combined voting power.
So before the redemption,
we're told that he owned 70 percent.
So in other words,
after the redemption is complete,
he has to own less than 80 percent of that amount or 56 percent.
To meet condition one,
and to meet condition two,
his ownership has to be less than 50 percent though.
Therefore, to satisfy both conditions,
he must own less than 50 percent after redemption to qualify under Section 302 (b)(2).
Nicholas, Emily, and Michael are
unrelated individuals who own all of the stock in Sunchaser Shakery Corporation,
which has E&P of $1.2 million.
Nicholas owns 1,500 shares,
Emily owns 300 shares,
and Michael owns 200 shares.
Assume Sunchaser redeems 900 of Nicolas' shares for $705,000 with a basis of $300,000.
And we want to know what are the tax effects of the redemption for Nicholas.
So let's begin by looking at Nicholas' ownership interest after the redemption.
So Nicholas has 1,500 shares beforehand,
and he's have 900 shares that are being redeemed.
There are 2,000 shares outstanding before the redemption,
and again, 900 shares are being redeemed.
So after the redemption,
Nicholas has a 54.6 percent ownership interest in the corporation.
As such, the redemption does not qualify as
a disproportionate redemption under
302 (b)(2) because his ownership interest exceeds 50 percent.
But we also learned about (b)(1) already,
which is whether it's essentially equivalent to a dividend,
but here, Nicholas still has control.