- 6 -
The funds available for redemption of stock will
be determined by the Board of Directors. The notes can
be paid off early without penalty at the discretion of
the Board of Directors.
Petitioner amended its bylaws on May 25, 1989, to include the
option to pay 10 percent of the sales price and give a 10-year
note for stock redemptions, because its sales volume dropped in
the previous 2 years and the board was concerned about whether
the company could survive a stock redemption. Petitioner’s
policy has been to pay cash for stock redemptions.
Petitioner adopted a formula by which it would value its
stock. The formula price per share was determined as 10 times
the average earnings per share for the previous 5 years, plus the
book value, then divided by 2. The redemption price per share,
based on the formula, was $2,682.62, $2,798.07, and $2,836.52 in
1995, 1996, and 1997, respectively. Petitioner used this formula
consistently for every redemption. If all of the Pedigo family
members had sought redemption of their stock, the redemption
would have required $1,975,750, $2,044,847, and $1,697,657 in
liquid assets in 1995, 1996, and 1997, respectively.
The only shares redeemed during the years in issue were 138
shares that Paul Pedigo inherited in 1993 and sold in 1996 for
$370,201.56. Paul Pedigo was not an officer or employee and was
not involved in petitioner’s business. He had been a music
educator for 30 years and retired shortly after the redemption of
his shares. Paul Pedigo wanted to invest the money to provide
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011