Sisters Theresa, Jessica, and Andrea own 100 shares, 100 shares, and 200 shares,
ID: 2501884 • Letter: S
Question
Sisters Theresa, Jessica, and Andrea own 100 shares, 100 shares, and 200 shares, respectively, in Red Corporation. Red Corporation has E and P of $150,000. The corporation redeems 60 shares of Andrea's stock for $60,000. Andrea paid $250 per share for the stock 5 years ago. Which happens with respect to the redemption?
a.Andrea has a long-term capital gain of $45,000.
b. Andrea has a long-term capital gain of $60,000.
c. Andrea has dividend income of $60,000.
d. Andrea has dividend income of $45,000.
e. None of the above
Explanation / Answer
Percentage of holding before redemption = 200/(100+100+200) = 50%
Percentage of holding after redemption = (200-60)/(400-60) = 41.17%
Since percentage of holding decreases from 50% than it would be treated as stock sale and treated as long term capital gain
Cost of share redeem = 250*60 = 15000
Sale value = 60000
Long term capital gain = 60000-15000
Long term capital gain = 45000
Answer
a.Andrea has a long-term capital gain of $45,000.