Leon owns 750 shares of the 2,000 outstanding shares of Crane Corporation (E & P of $900,000). None of the other shareholders of Crane is related to Leon. Leon acquired his Crane shares 10 years ago for $80,000. Crane has operated several trades or businesses for more than 5 years. In the current year, Crane sells the assets of one of those trades or businesses and distributes the proceeds from the asset sale to the shareholders in a pro rata stock redemption. In this transaction, Leon receives $250,000 in redemption of 300 shares of Crane. As a result of this transaction, Leon will recognize:

Question

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Leon will recognize a $218,000 long-term capital gain. This is because the distribution is treated as a sale or exchange of the shares, not as a dividend, due to the pro rata stock redemption. The gain is calculated based on the difference between the distribution amount and the basis of the shares redeemed. Assuming Leon's basis is allocated equally among his shares, the basis for the 300 shares redeemed would be $32,000 (300/750 of his original $80,000 basis), resulting in a $218,000 gain ($250,000 received - $32,000 basis).

Leon Owns 750 Shares of the 2,000 Outstanding Shares of Crane