Five years ago, Sophie transferred property she had used in her sole proprietorship to Galaxy Corporation for 100 shares of Galaxy Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $400,000 and a fair market value of $600,000 on the date of the transfer.In the current year, Galaxy Corporation (E & P of $900,000) redeems 20 shares from Sophie for $300,000 in a transaction that qualifies for sale or exchange treatment.With respect to the redemption, Sophie will have a:

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Sophie originally received 100 shares with a basis of $400,000, making the basis per share $4,000. When 20 shares are redeemed, the basis for those shares is $80,000 (20 shares x $4,000). The redemption amount is $300,000, resulting in a capital gain of $220,000 ($300,000 - $80,000).

Five Years Ago, Sophie Transferred Property She Had Used in Her