Veronica and Tracy, unrelated individuals, own all the stock in Beige Corporation as equal shareholders. Each has a basis of $20,000 in her 20 shares. Beige Corporation has accumulated E & P of $900,000. Veronica wishes to retire in the current year and wants to sell her stock for $500,000, the fair market value. Tracy would like to purchase Veronica's shares and, thus, become the sole shareholder in Beige Corporation. However, because Tracy is short of funds, Beige Corporation redeems all of Veronica's shares for $500,000. Which of the following is a correct statement regarding the tax consequences of this redemption?

Question

Quizplus · Accepted Answer

Veronica will have a capital gain of $480,000 because the redemption of her shares for $500,000 minus her basis of $20,000 in the shares results in a capital gain. This transaction is treated as a sale or exchange for Veronica, not as a dividend, because it results in a complete termination of her interest in the corporation.

Veronica and Tracy, Unrelated Individuals, Own All the Stock in Beige