TH Inc.has been in the storage business for 10 years.Prior to a stock redemption, TH has 100 shares of stock outstanding.The stock owned and the number of shares redeemed from each shareholder are as follows: $\begin{array} { l }\text { Name }&\text { Shares Owned before Redemption }&\text { Adrusted Basis }\
\text { L3 } & \$ 4,000 \
\text { E12 } & 3,000\D&60&6,000\G&5&1,000\\text { MMM Corp. }&20&2,000\100
\end{array}$
L is E's mother and D owns 40 percent of MMM Corp; otherwise the parties are unrelated.TH has $100,000 in accumulated and current earnings and profits.All of the parties have owned their stock since the inception of the corporation.During the year TH redeemed 25 shares of D's stock for $30,000.D's gain is
A)$30,000 dividend
B)$27,500 dividend
C)$30,000 capital gain
D)$27,500 capital gain
E)None of the above

Question

TH Inc.has been in the storage business for 10 years.Prior to a stock redemption, TH has 100 shares of stock outstanding.The stock owned and the number of shares redeemed from each shareholder are as follows: $\begin{array} { l  }\text { Name }&\text { Shares Owned before Redemption }&\text { Adrusted Basis }\
\text { L3 } & \$ 4,000 \
\text { E12 } & 3,000\D&60&6,000\G&5&1,000\\text { MMM Corp. }&20&2,000\100
\end{array}$
 L is E's mother and D owns 40 percent of MMM Corp; otherwise the parties are unrelated.TH has $100,000 in accumulated and current earnings and profits.All of the parties have owned their stock since the inception of the corporation.During the year TH redeemed 25 shares of D's stock for $30,000.D's gain is
A)$30,000 dividend
B)$27,500 dividend
C)$30,000 capital gain
D)$27,500 capital gain
E)None of the above

Quizplus · Accepted Answer

The redemption is treated as a dividend to the extent of TH's earnings and profits. TH has $100,000 in accumulated and current earnings and profits, so the first $100,000 of the redemption proceeds is treated as a dividend. The remaining $27,500 is treated as a capital gain.

TH IncHas Been in the Storage Business for 10 Years