Joshua owns 100% of Steeler Corporation's stock. Joshua's basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua's stock for $50,000, Joshua must report dividend income of

Question

Quizplus · Accepted Answer

When a shareholder's stock is redeemed, it is treated as a distribution of property and is taxable as either a dividend or capital gain. In this case, since Joshua's basis in the stock is $8,000 and Steeler Corporation has E&P of $40,000, the redemption will be treated as a dividend to the extent of Steeler's E&P ($40,000). Since 60% of Joshua's stock is being redeemed, he will receive $30,000 of the $50,000 redemption price as a dividend. Thus, Joshua must report dividend income of $30,000, which is Option B.

Joshua Owns 100% of Steeler Corporation's Stock