Roger owns 40% of the stock of Gold, Inc. (adjusted basis of $800,000). Silver redeems 60% of Roger's shares for $900,000. If the stock redemption qualifies for return of capital treatment, Roger's recognized gain is $100,000.

Question

Quizplus · Accepted Answer

The formula for calculating the recognized gain in a stock redemption that qualifies for return of capital treatment is:

Recognized Gain = Amount Received - Adjusted Basis x % of Shares Redeemed

In this case, the amount received by Roger is $900,000 and the percentage of shares redeemed is 60%, so:

Recognized Gain = $900,000 - $800,000 x 60% = $300,000 - which is not equal to $100,000 as stated in the question. Therefore, the answer is B (false).

Roger Owns 40% of the Stock of Gold, Inc