Beige, Inc., has 3,000 shares of stock authorized and 1,000 shares outstanding. The shares are owned by Sam (700 shares) and Lois (300 shares). Sam's adjusted basis for his stock is $100,000 and Lois' adjusted basis for her stock is $90,000. Beige's earnings and profits are $500,000. Beige redeems 200 of Lois' shares for $150,000. Determine the amount of Lois' recognized gain (1) if she is Sam's mother and (2) if they are unrelated.
A)$0 and $0.
B)$150,000 and $60,000.
C)$150,000 and $90,000.
D)$50,000 and $150,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Lois' recognized gain would be calculated as follows:

(1) If Sam and Lois are related, Lois' recognized gain on the redemption would be $0 because the redemption is between a parent and child, and under § 302(b)(3) no gain or loss is recognized by the parent.

(2) If Sam and Lois are unrelated, then Lois' recognized gain would be the amount realized ($150,000) less her adjusted basis in the redeemed shares ($30,000, or 30% of $100,000). Therefore, her recognized gain would be $120,000.