Part 2 C Corporations question: Pat owned

Part 2C Corporations

Pat owned 60 of a corporation's 100 shares. The corporation redeemed 30 of his shares, leaving him 30 of 70 outstanding. No attribution applies. How is the redemption treated?

A As an exchange, because it is substantially disproportionate
B As a dividend, because he still remains a shareholder afterward
C As a dividend, since he still owns over 40%
D As a complete termination of his interest

Show the answer and explanation

Answer: A. As an exchange, because it is substantially disproportionate

A redemption is a sale under section 302(b)(2) if afterward the shareholder owns less than 50% of the voting stock and his percentage is less than 80% of his percentage before. Pat goes from 60% to 30/70 = 42.9%, which is below 50% and below 48% (80% of 60%), so it is substantially disproportionate and taxed as an exchange. Source: IRC 302(b)(2); Pub. 542 (Rev. 01-2024), Redemption of stock. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake

Treating every partial redemption as a dividend.

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Original study material mapped to the public IRS SEE content outlines; not a real exam question.Not affiliated with or endorsed by the IRS or PSI. Verify figures and rules against current guidance before relying on them.