Question

A & W corporation is owned as follows (800 shares issues and outstanding): Mr. B Sr. 25% (200 shares) Mr. C Sr. (B's brother) 25% (200 shares) Mrs. B (B Sr.'s wife) 10% (80 shares) Mr. B Jr. 10% 80 shares) Mr. C. Jr. 15% (120 shares) Mrs. C (CSr.'s wife) ( 40 shares) Darrel (Mr. C Sr.'s grandson) 10% 80 shares) TOTAL 100% 5% " Determine the (1) amount and (2) character of a redemption on the shareholder if One-half of Mrs. B's shares are redeemed for $60,000 in cash. Mrs. B's basis in the redeemed shares is $20.000. E&P in the corporation is $1.000.000 $40,000 dividend $40,000 capital gain $60,000 dividend $60,000 capital gain

Answer 1

1. Mrs B is holding the 10% Shareholding of 80 Shares

Basis Price of 80 Shares is $20000 and the same shares are redeemed in cash for $60000

Capital Gain is levied on transfer of stock and the term redemption covered under transfer.

Therefore ($60000- $20000) i.e $40000 is Capital Gain

2. Darrel is holding 10% Shareholding of 80 Shares

Basis price of Redeemed stock is $80000 and same are redeemed for $60000

Therefore ($80000-$60000) $20000 is Capital Loss.

3. After the death of Mr.C , Half of his stock are redeemed to pay taxes.

The Redemption price of half of his stock is $180000 and and its basis price is $50000

Under the taxation price capital gain only when is required to be paid when shares are redeemed.

In this case half of stock of shares are not sold therefore the difference between the redemption price and basis price will be treated as dividend.

According the ($180000-$50000) = $130000 is Dividend