The B&B Windshield Wiper Corporation ("B&B") was organized 10 years ago by Betty and Billy, who are wife and husband. Betty and Billy formed B&B by transferring cash and other property to the corporation in exchange for 150 shares of the corporation's common stock. Betty and Billy own B&B's manufacturing plant and lease the plant to the corporation for an annual rental fee. B&B has been very successful and has a large amount of accumulated earnings and profits.

Five years ago, Betty and Billy's youngest son, Junior, began working for B&B as a clerk in the domestic subcompact wiper division. Junior's managerial talents were quickly recognized, and he has risen rapidly in B&B's corporate structure. Today, Junior is B&B's Vice President in charge of operations and has overall responsibility for production at B&B's manufacturing plant.

Shortly after Junior came to B&B, his parents agreed that he would eventually take over control and management of the company. Betty and Billy have now decided that the time has come to retire. To implement this decision, their accountant has suggested the following plan:

• Betty and Billy will give 30 of their 150 B&B shares to Junior to provide him with an ownership interest in the corporation.
• B&B will redeem Betty and Billy's remaining 120 shares for $150,000 plus a $400,000 B&B note paying market rate interest. The note will be payable monthly over a 20-year term and will be secured by an interest in the corporations' assets. Additionally, B&B will agree to restrict dividend payments, limit new indebtedness, and refrain from taking certain extraordinary corporate action (e.g., merger or liquidation) during the term of the note.
• Betty and Billy will continue to lease the manufacturing plant to B&B under a lease which has a rent escalation clause dependent upon the consumer price index. They also will grant B&B a five-year option to purchase the plant at its appraised fair market value.

1. Will Betty and Billy's redemption be classified as an exchange under 302(a)?
2. Suppose Betty establishes a management consulting firm after leaving B&B. What would be the tax impact on the redemption if B&B hired Betty's firm to perform an analysis of its proposed entry into the Australian windshield wiper market?

Answer rating: 100% (QA)

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