Clark, Bruce, and Diana, unrelated individuals, own all of the stock in Trinity
ID: 2544092 • 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 in the shares redeemed) 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- D. Clarke has dividend income of 625000.
Explanation- according to section 302(b)(2), a disproportionate stock redemption qualifies for sale/exchange treatmenr if both the following conditions are met-
Since the second condition is not met, the redemption will be treated as dividend income to clarke.