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Cerner Corporation announced a first-come, first-serve stock repurchase offer to its shareholders the company agreed to repurchase 2,653,780 shares of its common stock in exchange for total consideration of $173,434,000. Cerner had 329,641,500 total shares outstanding before the redemption.

You acquired 16,482,075 shares of Cerner's stock two years ago for $20/share. You were the only shareholder to participate in the repurchase offer and Cerner agreed to redeem the total number of shares directly from you.

1.Would a redemption of 2,653,780 of your shares qualify for exchange treatment under the substantially disproportionate with respect to the shareholder rules?

Yes or no?

2.Choose the response that accurately represents the amount and character of taxable income that you would report on your tax return with respect to the stock redemption assuming the redemption DID qualify for exchange treatment.

If applicable, you may assume Cerner's current E&P balance is well in excess of its total dividend distributions for the year.

Multiple Choice

$173,434,000 long-term capital gain

$120,358,400 dividend income

$120,358,400 short-term capital gain

$120,358,400 long-term capital gain

$173,434,000 dividend income

3.Choose the response that accurately represents the amount and character of taxable income that you would report on your tax return with respect to the stock redemption assuming the redemption DID NOT qualify for exchange treatment.

If applicable, you may assume Cerner's current E&P balance is well in excess of its total dividend distributions for the year.

Multiple Choice

$173,434,000 short-term capital gain

$120,358,400 dividend income

$120,358,400 long-term capital gain

$173,434,000 long-term capital gain

$173,434,000 dividend income

4.Using the applicable tax rates provided below, compute your after-tax savings if the redemption is treated as an exchange as opposed to a dividend distribution. Any dividend income amounts should be considered ordinary income in character.

For purposes of the after-tax savings calculation, you should assume you are liable for the net investment income tax on both capital gains and dividend income.

Applicable tax rates:

Individual - ordinary income - 34%

Individual - long-term capital gains - 20%

Individual - net investment income - 3.8%

Multiple Choice

$36,912,753

$53,075,600

$34,895,880

$20,062,577

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