Currently, Claire and her mother, Susan, are equal owners of Wilson Designs, Inc., a company that designs

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Currently, Claire and her mother, Susan, are equal owners of Wilson Designs, Inc., a company that designs and manufactures bridal gowns. As President and Chief Financial Officer, Claire basically runs the business while her mother has always headed up the creative side as Vice President of Creative Design.

After 30 plus years in the business, Susan has decided that it is time to at least “semi-retire” and hand the ownership of the business completely over to Claire. Susan plans to remain active in the design aspect of the business by offering her services to the company as an independent design consultant. She will be compensated as an independent contractor on a per project basis. Susan will keep her current office so that she will have a place to work. Consistent with her status as an independent contractor, she will not receive healthcare or any other employee benefits.

In order to accomplish this transition, Wilson Designs, Inc. will redeem all of Susan’s shares in the corporation. Susan will file the required agreement not to acquire any prohibited interest in Wilson Designs, Inc. for ten years.

Required: It is Susan’s understanding that the redemption will qualify for sale or exchange treatment under the Code as a complete termination of her interest in the corporation. She has come to you to verify the tax consequences of this transaction (disregard the tax consequences to the corporation—which uses its own tax consultants). Prepare a professional memorandum in response to Susan’s inquiry. Fully research the relevant authorities which will extend beyond the Code and the Regulations to include administrative decisions and case law.