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redemption of decedent’s shares on the ownership interest
inherent in the other shares not being redeemed.
A simplified example will illustrate the fallacy behind the
estate’s contention that BCC’s obligation to redeem decedent’s
shares should be treated as a liability offsetting a
corresponding amount of corporate assets. Assume corporation X
has 100 shares outstanding and two shareholders, A and B, each
holding 50 shares. X’s sole asset is $1 million in cash. X has
entered into an agreement obligating it to purchase B’s shares at
his death for $500,000. If, at B’s death, X’s $500,000
redemption obligation is treated as a liability of X for purposes
of valuing B’s shares, then X’s value becomes $500,000 ($1
million cash less a $500,000 redemption obligation). It would
follow that the value of B’s shares (and A’s shares) is $250,000
(i.e., one half of the corporation’s $500,000 value35) upon B’s
death. Yet if B’s shares are then redeemed for $500,000, A’s
shares are then worth $500,000-–that is, A’s 50 shares constitute
100-percent ownership of a corporation with $500,000 in cash.
It cannot be correct either that B’s one-half interest in $1
million in cash is worth only $250,000 or that A’s one-half
35 Among other simplifications, this example ignores the
existence of discounts or premiums attributable to the magnitude
of the ownership interest represented by corporate shares. We
note that the parties do not contend that any such discounts or
premiums are appropriate in the instant case.
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