Question

Swift Corporation agreed to redeem some of the shares of two of its shareholders. It distributed land (basis $55,000 and fair market value $120,000) to Sam in exchange for part of his stock. Sam's basis in the redeemed stock was $25,000. Swift also distributed $240,000 cash to Allison in exchange for part of her stock. Allison's basis in the redeemed stock was $40,000. As a result of the redemptions, Sam's interest in the corporation declined from 20% to 15%, and Allison's interest declined from 70% to 60%. Determine the tax consequences to Swift, Sam, and Allison if Swift is:

a. A C corporation.

b. An S corporation.

Answer 1

Refer the below images for the above asked questions in a detailed way of explanation.
Answer: Requoirement @ :- Sobstantially under Sec 302(b)(2) Since transaction aoalifies the as a -> distribu tion for dis proportionate Sam he capital Yetorn of receives treatment. particolars Armount realized Amount ।२०००० Less: Basis tor Stock redeemed $ ra5000] Realized gain -> $95000 . Recognized gain = $9 5000 capital gain - classified as a The gain is -> distributed is appreciated property, recognized gain of $ 65000 [ie$120000 land > As the has a Swift - $55000] Alli son's redemption does not → Becaose Vuality for stock redemphion treat ment, She most report the $ 240000 Yeceived dividend as income. The $40,000 basis for AlUiSon by her vemaining Shares. Surren dered the Shares is reallocated to

Requirement O:- Stock vedemption A bove (i.e, $95000 capita) gain). of the to > The tax Sam conse yuences in Same as part are + Swift distribo tion of the yecogri zed gain of $ 6500 land also has a on the Sam- to However, Since Swift ĭs an "S orporation the $6500 recogniged gain is level. taxable at Share holder the Therefore, must inclede in his Sam income, grass of the $6500 (o1) his pro - vata Shave $9750 [ie, $6500 X 151 voalitying Stock basis by Allison » The tax Conse quences of to the non- stouk redemphion Loill be to yeduce her the $ 240000 most also include in her grass income her AlliSon $ 65000 recogni 3ed gain, the pro-vata Chare of (0r) $ 39000 [ie, $65o0X 60%