Jack Corporation redeems 200 shares of its stock for $100,000 from Junior, who inherited the stock from his father, Ken. The stock's FMV on Ken's date of death was $90,000. Ken's basis in the stock was $40,000. Jack Corporation had an E&P balance of $300,000. If the redemption qualifies under Sec. 303, Junior will
A)recognize a capital gain of $10,000.
B)recognize a capital gain of $60,000.
C)recognize $100,000 in dividend income.
D)recognize dividend income of $50,000 and a capital gain of $10,000.

Question

Quizplus · Accepted Answer

Under Sec. 303, if the redemption qualifies, the amount received up to the estate's basis is treated as a sale or exchange, not as a dividend. Since the FMV at Ken's death was $90,000 and Junior received $100,000, Junior recognizes a capital gain of $10,000, which is the difference between the redemption amount ($100,000) and the FMV at Ken's death ($90,000), assuming the FMV at death is stepped up to become Junior's basis.

Jack Corporation Redeems 200 Shares of Its Stock for $100,000