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.Smith and Jones are not related.The company redeems Smith's 30 shares 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.Smith will recognize
A)dividend income of $12,000.
B)dividend income of $9,000.
C)capital gain of $12,000.
D)capital gain of $9,000.

Question

Quizplus · Accepted Answer

Since Smith is redeeming his shares at a price higher than his cost per share of $100, he will recognize a capital gain. The calculation for his gain will be the redemption price ($400) minus his cost per share ($100), multiplied by the number of shares redeemed (30). Therefore, his capital gain will be $9000. This is not considered dividend income because it is a redemption of shares, not a distribution of earnings.

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