Carol,Bonnie,and Ann,sisters,own 300 shares,300 shares,and 400 shares,respectively,in Teal Corporation (E & P of $600,000).Teal Corporation redeems all of Ann's stock for $250,000.Ann paid $100 a share for the stock five years ago.Ann continued to serve as president of Teal after the redemption.With respect to the redemption:

Question

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Ann's basis in the stock was $100 per share, so her basis in the 400 redeemed shares was $40,000. The amount of the redemption ($250,000) less Ann's basis ($40,000) equals $210,000, which is the amount of Ann's long-term capital gain. Since Ann continued to serve as president after the redemption, it is not treated as a distribution of E & P, and therefore not taxable as dividend income.

Carol,Bonnie,and Ann,sisters,own 300 Shares,300 Shares,and 400 Shares,respectively,in Teal Corporation (E