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 20 shares from Jones at a redemption price of $400 per share. No stock is redeemed from Smith. This is not a redemption to pay death taxes, and it is not a partial liquidation. What is the tax impact on Jones?

Question

Quizplus · Accepted Answer

The redemption is treated as a dividend because Jones still owns more than 50% of the corporation after the redemption. The amount received ($8,000) minus the cost basis of the redeemed shares ($2,000) results in $6,000, which is treated as dividend income.

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