The stock of Bluebird Corporation is held 15% by Rosa and 85% by Beth. Joe would like to purchase all the stock but has only enough cash to pay for 70%. Bluebird Corporation has enough cash on hand to redeem 30% of its shares. Rosa and Beth are hoping that redemptions can be combined with other transactions so they would receive sale treatment under the redemption in complete termination rules. Two alternatives considered by the parties for carrying out the transaction are:
• Bluebird Corporation redeems 30% of the shares from Beth. Joe purchases the remaining 55% held by Beth and the 15% held by Rosa.
• Joe borrows money from a bank to purchase all of Rosa's and Beth's shares. Later, Joe has Bluebird redeem 30% of the shares he purchase so that he can pay off the bank loan.
a. Determine the tax consequences of the two alternatives for Rosa, Beth, and Joe.
b. Prepare and submit a typed solution describeing the tax consequences. No particular format is required but you must provide the citations for the primary authorities that you are relying on for each alternative.