Z is a corporation in the fast food business and the shoe business and has two i

Question

Z is a corporation in the fast food business and the shoe business and has two individual shareholders, C and D. Z's slogan is, "Take Care of Your Feet While You Eat." Z owns 10 fast food stroes which are adjacent to 10 shoe stores that it owns. This arrangement has continued for at least 10 years. Z proposes to sell the fast food stores since one of his executives ahs taken to heart the comment that fast food is neither. Z will distribrute the proceeds of the sale of the food stroes to C and D in pro rata redempiton. Z will over time convert its shoe inventory to upscale footwear made in Italy and Brazil.

a The pro rata distribution is a dividend to C and D

b The pro rata distribution is a dividend to C and D since they did not surrender any shares for redemption.

c The pro rata distribution is not essentially equivalent to a dividend under 302 (b)(1)

d The pro rata distribution is not essentially equivalent to a dividend under 302(b)(4)

e None of the above.

Which is the correct answer and why?

Explanation / Answer

Z incorporation has two shareholders C and D. Companies do sell their divisions which are not profitable but sale of a particular division among a number of divisions does not mean any change in share holding since no share are reddemed or sold. Distribution of sales proceeds from the sale of 10 food stores is certainly a dividend since dividend means distribution of earnings by a company to its shareholders and proceeds from sale of food stores is earning to the company.

Thus, Distribution of sales proceeds is a dividend to C and D

Therefore answer to above question is (a).

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