Cardinal Corporation (E & P of $700,000)has 1,000 shares of stock outstanding.Lupita owns 300 shares of Cardinal stock,Berta (Lupita's sister)owns 500 shares,and April (Lupita's daughter)owns 200 shares.The corporation redeems 200 shares of Lupita's stock for $100,000.Lupita paid $100 a share for the stock five years ago.With respect to the redemption:

Question

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The redemption meets both tests of § 302(b)(2).Before and after the redemption,Lupita is deemed to own April's 200 shares.Thus,Lupita owns 50% [(300 + 200)F1F1F1S1F1F1F10 1,000] of the shares outstanding before the redemption,and 37.5% [(100 + 200)F1F1F1S1F1F1F10 800] of the shares outstanding after the redemption.The 37.5% ownership is less than 50% of the total voting power and less than 80% of Lupita's original ownership (80% F1F1F1S1F1F1F10 50% = 40%).Thus,the distribution qualifies as a disproportionate redemption and $80,000 of long-term capital gain is recognized [$80,000 = $100,000 (amount realized)- $20,000 (basis of shares redeemed)].Lupita is not deemed to own the stock of her sister,Berta,under the § 318 attribution rules.

Cardinal Corporation (E & P of $700,000)has 1,000 Shares of Stock