Rodolfo makes a gift of § 306 stock basis of $75,000, fair market value of $100,000) in Kiwi Corporation to his daughter, Josie. When the stock was issued to Rodolfo, his share of Kiwi Corporation's E & P was $80,000. When its E & P is $200,000, Kiwi Corporation redeems all of Josie's stock for $100,000. With respect to the stock redemption:

Question

Quizplus · Accepted Answer

Josie will recognize dividend income of $100,000 because the redemption of stock is treated as a distribution from the corporation, and since the distribution exceeds her basis in the stock, the entire amount of the redemption ($100,000) is considered dividend income to her. This is based on the assumption that the corporation has sufficient earnings and profits (E&P), which in this case it does ($200,000), to cover the distribution.

Rodolfo Makes a Gift of § 306 Stock Basis of $75,000