Ed has decided to retire and cmpletely terminate his interest in hs closely held

Question

Ed has decided to retire and cmpletely terminate his interest in hs closely held business. He currently owns 60% of the coporation, while his som owns the remaining 40%. His son received his 40% more than 20 years ago as a gift frm his father. If Ed's shares are completely redeemed without a wavier, what percentage of the corporation is ed deemed to own? A. 100% before and 0% after redemption B. 100% before and 100% after redemption c. 60% before and 0% after redemption D. 60% before and 40% after the redemption

Explanation / Answer

The correct answer is D. Ed is deemed to own 60% of the corporation before and 40% of the corporation after redemption. Because in case of closely held family businesses, the complete redemption of a person's interest without waiving can not result in termination of his interest if any other family member will continue to own stock in that corporation. Generally, stock owned by one family member is deemed to be owned by other family member (constructive ownership).

Thus if a parent and a child both own stock in a corporation and the parent redeems all of his stock, the parent will be deemed to own the stock owned by the child after redemption, causing the parent to not have a complete termination of his or her stock interest.

Thus in the given case also, Ed will continue to be deemed owner of 40% of the stock of the corporation after redemption as his son owns it. Thus before redemption his ownership was 60% and after redemption his deemed ownership was 40%.  

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