Five years ago,Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 1,000 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 $550,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $1 million)redeems 100 shares from Eleanor for $290,000 in a transaction that qualifies for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

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The transaction is treated as a return of a portion of her investment.She is treated as having sold 100 of her shares in Blue (basis of $40,000)for $290,000.Therefore,Eleanor's capital gain from the sale or exchange is $250,000 ($290,000 - $40,000).

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