Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue 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 $700,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

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Eleanor will have a $140,000 capital gain because the transaction qualifies for sale or exchange treatment. The basis of her shares is determined by the original transfer under § 351, which was $400,000 for 2,000 shares, making the basis per share $200. Upon redemption of 600 shares, her basis for these shares is $120,000 ($200 * 600). The difference between the redemption amount ($260,000) and the basis of the redeemed shares ($120,000) results in a capital gain of $140,000.

Seven Years Ago, Eleanor Transferred Property She Had Used in Her