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Corporate E&P is $100,000. Cindy’s tax basis in her shares is $1,000,000 ($5,000 per share). She...

Corporate E&P is $100,000. Cindy’s tax basis in her shares is $1,000,000 ($5,000 per share). She receives $800,000 in exchange for her 50 redeemed shares. IGNORING the “correct” answer, would Cindy PREFER that the redemption be classified as a distribution or as an exchange?

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Answer #1

The redemption of 50 shares of $5000 each in exchange of $800000 shall be covered under the classification of Exchange and not in the category of distribution because it is not the distribution of dividend it is buying back of the shares of the company from Cindy. Capital gain shall be charged on the same transaction since the rate of tax on capital gain is lower on the resultant gains.

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