Hannah, Greta, and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah, 600 shares; Greta, 400 shares; and Winston, 1,000 shares. Greta is Hannah's daughter, and Winston is Hannah's brother. Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000. Hannah purchased the stock three years ago as an investment. With respect to the stock redemption, Hannah has:
A) Long-term capital gain of $185,000.
B) Long-term capital gain of $240,000.
C) Dividend income of $185,000.
D) Dividend income of $240,000.
E) None of these.

Question

Quizplus · Accepted Answer

CThe correct answers are A) Long-term capital gain of $185,000 and C) Dividend income of $185,000. This is because the tax treatment of the proceeds from the stock redemption depends on whether the redemption qualifies for sale or exchange treatment. If it qualifies, Hannah would recognize a long-term capital gain of $185,000, calculated as the difference between the redemption proceeds ($240,000) and her basis in the shares redeemed ($55,000). If it does not qualify and is treated as a dividend, the entire $240,000 would be considered dividend income. However, since the question does not provide enough information to definitively conclude whether the redemption qualifies for sale or exchange treatment, both A and C could be considered correct based on the information given.

Hannah, Greta, and Winston Own the Stock in Redpoll Corporation