| Course | AC507 Business Taxation and Strategies |
|---|---|
| Unit | Unit 5 |
| Paper type | Stock redemption analysis |
| Length | About 640 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MS in Accounting |
| Updated | October 2026 |
Free sample paper for AC507 Unit 5
150 Shares Fail, 185 Pass: A Unit 5 Redemption Analysis With Partnership Attribution
[Student Name]
Purdue University Global
AC507: Business Taxation and Strategies
Unit 5 Redemption Analysis
[Instructor Name]
[Date]
The marine fabrication company, its shareholders, the LLC and every figure are composite; the statutes, case and publication cited are real; this is coursework analysis, not tax advice.
Ownership Table
Before the redemption, 1,000 shares are outstanding. Lucas owns 350 directly. A boatyard LLC in which he holds a 60 percent interest owns 300. Two unrelated investors own the remaining 350.
Stock owned by a partnership is treated as owned proportionately by its partners (Constructive ownership of stock, 26 U.S.C. § 318, 2018). Sixty percent of the LLC's 300 shares, or 180, is attributed to Lucas. His total ownership before the redemption is 530 shares, or 53 percent.
After a redemption of 150 shares, 850 shares remain outstanding, and Lucas owns 200 directly plus 180 by attribution, 380 shares, or 44.71 percent.
Part 1: The Substantially Disproportionate Test
A redemption is treated as a sale, not a dividend, when two conditions hold afterward: the shareholder has under half the voting power, and his share has dropped below four fifths of what it was (Redemptions of stock, 26 U.S.C. § 302, 2018). Lucas clears the first test, since 44.71 percent is below 50. He fails the second: 80 percent of 53 percent is 42.4 percent, and 44.71 percent is above it.
Part 2: The Threshold
To pass, his percentage after redeeming x shares must be below 42.4 percent: (530 less x) divided by (1,000 less x) must be less than 0.424. Solving gives x greater than 184.03. A redemption of 185 shares leaves him with 165 direct and 180 attributed, 345 of 815 shares, or 42.33 percent, which passes. He also stays below 50 percent.
The LLC's shares make 150 look like a meaningful reduction when it is not, because attribution keeps 180 shares in his column no matter how many of his own he sells, so the redemption has to be about a quarter larger to cross the line.
Part 3: Tax on Each Choice
The company will pay $400 a share, and Lucas's basis is $50 a share.
150 shares, failing the test. If no other test applies, the $60,000 payment is a distribution under the dividend rules, a qualified dividend to the extent of the company's earnings and profits, which are ample. His $7,500 basis in the redeemed shares shifts to his remaining shares rather than being lost. The meaningful-reduction test does not rescue him: he remains the controlling shareholder in practice, and in the leading case the Court ruled that a buyback escapes dividend treatment under that test only if it meaningfully reduces the shareholder's interest, counting attribution, whatever its business purpose (United States v. Davis, 1970).
185 shares, passing. The $74,000 payment is treated as a sale. His basis in the 185 shares is $9,250, so he recognizes a $64,750 long-term capital gain.
At the same 20 percent rate, the difference is small in this year: tax on a $60,000 dividend is $12,000, and tax on a $64,750 gain is $12,950. The real difference is basis recovery and the use of capital losses: Lucas has a $40,000 capital loss carryforward from a failed investment, which can offset the redemption gain but not a dividend. On the 185-share sale, his tax falls to about $4,950.
Part 4: Other Options
If Lucas wants to sell only 150 shares, the LLC could first distribute some of its shares to its members, or Lucas could reduce his LLC interest. Either would cut the attributed shares, though each has its own tax effects in the LLC. Complete termination is not available: the family waiver of attribution does not apply to attribution from entities (Internal Revenue Service, 2025).
References
Constructive ownership of stock, 26 U.S.C. § 318 (2018).
Internal Revenue Service. (2025). Corporations (Publication 542). U.S. Department of the Treasury.
Redemptions of stock, 26 U.S.C. § 302 (2018).
United States v. Davis, 397 U.S. 301 (1970).
Reading the AC 507 Unit 5 instructions
In the fifth AC507 unit, a buyback has to be classified as either an exchange or a distribution taxed under the dividend rules. Build an ownership table before and after, including stock attributed from family and entities. Apply each relevant test in order, showing the percentages. If the redemption fails, solve for the smallest redemption that passes. Consider the meaningful-reduction test and explain why it does or does not help. Compute the tax under each treatment, including basis recovery and the use of any capital losses, so the practical difference is clear. Discuss alternatives that change the ownership picture, such as reducing the entity interest that drives attribution, and note limits on waiving attribution. List sections 302 and 318, the Davis decision and Publication 542 as APA 7 references.
Inside the AC507 Unit 5 example
The sample's table attributes 180 of the LLC's 300 shares to Lucas, giving 53 percent before and 44.71 percent after a 150-share redemption. Part one shows he clears the 50 percent line but not the 42.4 percent ratio. Part two solves the inequality to 184.03 and confirms 185 shares leave him at 42.33 percent. The highlighted sentence explains how attribution drives the threshold. Part three compares a $60,000 dividend with a $74,000 sale producing $64,750 of gain, notes basis shifting and the Davis case, and shows a $40,000 capital loss carryforward cutting the sale's tax to about $4,950. Part four discusses reducing the LLC's holdings and why the family waiver cannot help.
Reading the AC507 Unit 5 grading rubric
Redemption analyses in AC507 earn points for correct attribution and precise application of each test. Graders check the ownership table, the before and after percentages and both prongs of the substantially disproportionate test. The rubric rewards solving for the threshold rather than guessing, and explaining why the meaningful-reduction test does not rescue a controlling shareholder. Tax comparisons should show basis recovery and the use of capital losses, which is where sale treatment usually matters. Alternatives must respect the limits on waiving entity attribution. Analyses that ignore attribution, or apply the family waiver to entity shares, lose substantial credit. A clean table and APA 7 references to the statutes and case are expected.
AC507 Unit 5 help: mistakes that cost points
Common Unit 5 errors start with leaving the LLC's shares out of the ownership table, which makes the 150-share redemption pass. Others apply only the 50 percent test and forget the 80 percent ratio. Students compute the after percentage using the original 1,000 shares outstanding. The threshold is guessed rather than solved. Dividend and sale treatment are said to cost the same because the rates match, missing basis and capital losses. The family waiver is applied to entity attribution. If your section's shareholder has family attribution or multiple redemptions, a writer can rebuild the table and tests from your facts.
Get an AC507 Unit 5 example written to your instructions
Include the Unit 5 share register, any entity or family relationships among holders, the price and basis per share and the earnings figure, together with your rubric. Attribution is mapped first, each Section 302 route is tested to its consequence, and the analysis arrives in 24-48h. A first custom sample costs nothing. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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AC507 Unit 5 questions, answered
If dividends and capital gain share a rate, why does sale treatment matter?
Basis. Under exchange treatment Lucas subtracts the redeemed shares' basis and reports only the gain; under dividend treatment the entire payment is income and the basis merely migrates to his other shares. Capital gain can also absorb capital losses, which a dividend cannot. The example shows both effects and brackets the rates, since qualified dividend and long-term gain rates depend on the year and his income.
Why can't Lucas waive the attribution from his LLC?
The waiver in Section 302(c)(2) reaches only family attribution under Section 318(a)(1), and only when the redemption completely terminates the shareholder's interest. Entity attribution under Section 318(a)(2) has no individual waiver. Lucas could change the result only by changing the facts, for instance by reducing his LLC interest first, and the example notes that such a step would draw scrutiny if taken solely for tax.
Where can I find a free AC507 Unit 5 sample paper?
This page holds a full AC507 Unit 5 redemption analysis for a shareholder of a composite marine fabrication company with partnership attribution, the 80 percent test, a solved threshold, tax comparison and APA 7 references.
How was the 185-share threshold found?
By requiring his ownership after the redemption, 530 less x shares out of 1,000 less x, to fall below 42.4 percent. Solving gives x above 184.03, so 185 shares is the smallest redemption that passes.
Why does a capital loss carryforward matter here?
Sale treatment produces capital gain that his $40,000 carryforward can offset, cutting his tax to about $4,950. A dividend cannot absorb capital losses, so the same carryforward would sit unused.