The outstanding stock of Riccardo Corporation is owned as follows: $\begin{array} { l l }
\text { Robert } & \text { 100 shares } \
\text {Megan (Robert's daughter) } & 100 \text { shares } \
\text { Kyle (Robert's cousin)} & 100 \text { shares } \
\text { RMD, Inc. } &\underline{ \text { 100 shares }} \
\text { Total shares autstanding } & \text { 400 shares }
\end{array}$
Robert owns 50% of RMD, Inc.stock.The rest of RMD, Inc.stock is owned by unrelated parties.Riccardo Corporation redeems 90 of Robert's shares of stock for $9,000 in the only redemption transaction this year.Robert's basis for his stock is $10 per share (100 shares @ $10 = $1,000).Riccardo Corporation has $300,000 in E&P.How much capital gain or dividend income does Robert recognize as a result of this redemption?

Question

The outstanding stock of Riccardo Corporation is owned as follows: $\begin{array} { l l } 
\text { Robert } & \text { 100 shares } \
\text {Megan (Robert's daughter) } & 100 \text { shares } \
\text { Kyle (Robert's cousin)} & 100 \text { shares } \
\text { RMD, Inc. } &\underline{ \text { 100 shares }}  \
\text { Total shares autstanding } & \text { 400 shares }
\end{array}$
 Robert owns 50% of RMD, Inc.stock.The rest of RMD, Inc.stock is owned by unrelated parties.Riccardo Corporation redeems 90 of Robert's shares of stock for $9,000 in the only redemption transaction this year.Robert's basis for his stock is $10 per share (100 shares @ $10 = $1,000).Riccardo Corporation has $300,000 in E&P.How much capital gain or dividend income does Robert recognize as a result of this redemption?

Quizplus · Accepted Answer

The redemption of shares is treated as a dividend (ordinary income) to the extent of the corporation's Earnings and Profits (E&P). Since Riccardo Corporation has $300,000 in E&P, which is more than enough to cover the $9,000 redemption, the entire amount is considered dividend income to Robert.

The Outstanding Stock of Riccardo Corporation Is Owned as Follows