Rosa owns all 100 shares of the outstanding stock of Stork Corporation E & P of $500,000). Rosa had acquired the stock 12 years ago for $100,000. Stork, which has several trades or businesses that it has developed and operated for more than 5 years, sells one of those trades or businesses and, in a transaction qualifying as a partial liquidation [under § 302b)4)], redeems 20 shares of Rosa's stock for $300,000. As a result of this transaction, Rosa must recognize:

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The transaction qualifies as a partial liquidation under § 302(b)(4), which means Rosa is treated as if she sold the shares back to the corporation. The gain is calculated as the difference between the sale proceeds ($300,000) and the basis of the shares sold. Since Rosa originally acquired the stock for $100,000 and sold 20% (20 out of 100 shares), her basis in the sold shares is 20% of $100,000, which is $20,000. The gain is therefore $300,000 - $20,000 = $280,000. This gain is treated as a long-term capital gain because Rosa held the stock for more than one year (12 years in this case).

Rosa Owns All 100 Shares of the Outstanding Stock of Stork