Clark, Bruce, and Diana, unrelated individuals, own all of the stock in Trinity
ID: 2541085 • Letter: C
Question
Clark, Bruce, and Diana, unrelated individuals, own all of the stock in Trinity Corporation (E & P of $1.2 million) as follows: Clark, 1,500 shares; Bruce, 300 shares; and Diana, 200 shares. Trinity redeems 900 of Clark’s shares (basis of $210,000) for $625,000. With respect to the distribution in redemption of the stock:
Clark has a capital gain of $415,000.
Clark has a capital gain of $625,000.
Clark has dividend income of $415,000.
Clark has dividend income of $625,000.
None of the above.
a.Clark has a capital gain of $415,000.
b.Clark has a capital gain of $625,000.
c.Clark has dividend income of $415,000.
d.Clark has dividend income of $625,000.
e.None of the above.
Explanation / Answer
Answer:
Clark has dividend income of $625,000.
Explanation to the answer:
this Distribution are not satisfying even one of the provision of the stock redemption so in this case this Distribution will be taxed as the dividend income
Clark’s Ownership interest in the Trinity Corporation after redemption is
calculation is based on number of share after redemption
= 600 shares owned ÷ 1,100 shares outstanding
=600 /1100
=54.54%
Clark’s also continues for controlling the Trinity Corp. even after the redemption (as ashen holding more than 50% share)
This transaction fails both not essentially equivalent redemption provision & disproportionate redemption provision.
$210,000 basis in stock redeemed attaches to that of Clark's remaining stock in Trinity Corp.