Substantially Disproportionate Redemption

Substantially Disproportionate Redemption means:
a situation that occurs when (1) immediately after a redemption, a shareholder owns less than 50% of the total combined voting power of all classes of stock entitled to vote; (2) immediately after the redemption, the ratio of the stock the shareholder owns to all voting stock is less than 80% of that ratio immediately before the redemption; and (3) the shareholder's ownership of common stock (whether voting or nonvoting), both before and after the redemption, also fails the 80% test. The word ownership includes not only actual ownership but also constructive ownership under Former IRC (check if this IRC provision is current here) §318. Such a redemption allows the shareholder to reduce any gain by his or her stock basis, and the resulting gain or loss is treated as a capital transaction rather than a dividend. See also attribution rules. Former IRC (check if this IRC provision is current here) §302(b)(2).

See Dividend in the American Legal Encyclopedia and Dividend in the World Legal Encyclopedia.