A corporation is owned 70% by Jones and 30% by Smith.Jones owns 70 shares with a cost of $100 each.Smith owns 30 shares with a cost of $100 per share.The company redeems 5 shares from Smith at a redemption price of $400 per share.No stock is redeemed from Jones.This is not a redemption to pay death taxes,and it is not a partial liquidation.What is the tax impact on Smith?

Question

Quizplus · Accepted Answer

When a shareholder sells their stock back to the corporation at a price greater than their cost basis, the difference is considered a dividend. In this case, Smith sold 5 shares at $400 per share, which is $300 more than his cost basis of $100 per share. Therefore, Smith will receive a dividend of $300 per share redeemed, for a total of $1,500, which will be taxed as ordinary income. Note that this would be different if it was a partial liquidation or redemption to pay death taxes, but based on the information given, only choice A is correct.

A Corporation Is Owned 70% by Jones and 30% by Smith.Jones