Question

Scarlet Witch, The Vision, and Peter Parker, unrelated individuals, own all of the stock in New Avengers Corporation (E & P of $800,000) as follows: Scarlet Witch, 500 shares; Vision, 150 shares; and Peter, 100 shares. New Avengers redeems 225 of Scarlet Witch’s shares (basis of $100,000) for $325,000.

a.       Will this transaction qualify as a redemption of stock?

b.      What amount of gain will Scarlet Witch realize and recognize and what will be the character of the gain?

Answer 1

a) Yes, the above transaction would qualify as redemtion of stock since the stocks are not being sold to any other investor. The stocks are being sold to the company itself. Hence, this would qualify as redemption and not sale of stock.

b) Since the 500 shares of Scarlet Witch are basis $ 100,000, each share with scarlet would have cost her $ 200 (i.e $100,000/500). Accordingly, cost of stock being redeemed would be $45,000 (i.e. 225 shares * $ 200). Hence, the amount of gain to be realized and reconized by Scarlet would be $ 280,000 (i.e. $325,000 - $45,000).

The gain would be a long term gain.