Bluebird Corporation's 500 shares outstanding are owned as follows: Lucinda,200 shares; Carl (Lucinda's father),100 shares; and Nancy (Lucinda's sister),200 shares.During the current year,Bluebird (E & P of $800,000)redeemed 80 shares of Lucinda's stock for $60,000.If Lucinda had acquired the 80 shares five years ago for $10,000,she will have a long-term capital gain of $50,000 from the redemption.

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Under the family attribution rules,Lucinda is deemed to own the shares owned by her father,Carl,but not her sister,Nancy.After the redemption,Lucinda therefore owns 220 shares of Bluebird Corporation (120 shares directly plus Carl's 100 shares indirectly).Lucinda's post-redemption ownership percentage is 52.4% (220 shares F1F1F1S1F1F1F10 420 shares).This ownership interest fails the disproportionate redemption test that requires the taxpayer to own less than 50% of total voting power after the redemption.Further,Lucinda's majority shareholder interest after the redemption fails the meaningful reduction test for a not essentially equivalent redemption.Thus,Lucinda has $60,000 of dividend income from the redemption.(Her $10,000 basis in the shares redeemed attaches to the basis of her remaining 120 shares.)

Bluebird Corporation's 500 Shares Outstanding Are Owned as Follows: Lucinda,200