McGraw-Hill's Taxation of Business Entities 3rd Edition by Connie Weaver, Brian Spilker, Edmund Outslay, John Robinson, Ronald Worsham, Benjamin Ayers, John Barrick

Exercise 39

{ research } In Problem 55, Nancy would like to have Frank stay on as a consultant after all of his shares are redeemed. She would pay him a modest amount of $500 per month. Nancy wants to know if there is any de minimis rule such that Frank would not be treated as having retained a prohibited interest in the company because he is receiving such a small amount of money. Consult Lynch v. Comm. , 801 F.2d 1176 (CA-9 1986), reversing 83 T.C. 597 (1984), Seda , 82 T.C. 484 (1984), and Cerone , 87 T.C. 1 (1986).
Problem 55
Boots Inc. is owned equally by Frank Albert and his daughter Nancy, each of whom hold 1,000 shares in the company. Frank wants to retire from the company, and it was decided that the company will redeem all 1,000 of his shares for $25,000 per share on December 31, 2010. Frank's income tax basis in each share is $500. Boots Inc. has current E P of 1,000,000 and accumulated E P of $5,000,000.
a. What must Frank do to ensure that the redemption will be treated as an exchange
b. If Frank remained as the chairman of the board after the redemption, what is the amount and character (capital gain or dividend) of income that Frank will recognize in 2010
c. If Frank treats the redemption as a dividend in 2010, what happens to his stock basis in the 1,000 shares redeemed