Tax memo Essay Example | Topics and Well Written Essays - 500 words

Tax memo - Essay Example In the case of Acme Corporation and its shareholders, the redemption exercise may imply one or more tests, usually referred to as the three major tests. First is the complete redemption test. Here, there will be an absolute redemption of every stock possessed by the shareholder. Second is the substantially disproportionate test where the vending shareholder must not possess as much as 50 percent of the voting power following the redemption exercise. In addition, the owners voting stock in the company need to be not as much as 80 percent of the company’s aggregate voting stock after the redemption exercise. Third is what has been referred to as the â€Å"not essentially equivalent to a dividend test† (Ronald, 48). Here, the implication is that the redemptions need not be equal to the dividend issued by the company. It is important to note that the shareholder’s constructive, direct and indirect ownership can be considered in the above explained tests. If a shareho lder meets the above tests, the price that the company redeems the ownership will be treated like a normal exchange of sale and this will be recognized as if the owner was only passing this to another person or a third party. If the tests are not met, the company’s redemption price will be taken like the passing was made to another shareholder. Tax cost of a redemption to shareholders does start with if the transaction succeeds for sales or interchanged treatment, also Smith should confirm whether Acme Corporation has accrued return and earnings. If Acme does not have returns and earnings or the company has never acquired another company through merging, which had profit and earnings then the divided treatment cannot come into being from redemption. Normally dividends shared among its shareholders are usually treated as non-taxable return of capital to the point of accustomed foundation of stock, then capital growth from estimated nature of