Kingbird Corporation (E & P $400,000)has 2,000 shares of stock outstanding.That stock is held by Amata (1,200 shares)and Esteban (800 shares),who are unrelated individuals.Kingbird redeems 500 of Amata's shares for $250 per share.Amata paid $70 per share for her Kingbird stock nine years ago.Which of the following statements is correct with respect to the stock redemption?

Question

Quizplus · Accepted Answer

The transaction qualifies for sale or exchange treatment as a disproportionate redemption.Amata's 46.7% (700 shares ÷ 1,500 shares)postredemption interest in Kingbird is less than both 80% of her preredemption interest [46.7% < 48% (80% F1F1F1S1F1F1F10 1,200 shares ÷ 2,000 shares)and 50%.The stock was held for more than one year; thus,the result is a long-term capital gain of $90,000 [$125,000 (amount realized)- $35,000 (basis of 500 shares redeemed)].The basis of Amata's remaining shares is $49,000 (700 shares F1F1F1S1F1F1F10 $70).The reduction in Kingbird's E & P as a result of the qualifying stock redemption is limited to $100,000 [25% (percentage of shares outstanding redeemed)F1F1F1S1F1F1F10 $400,000 (E & P at time of redemption)].

Kingbird Corporation (E & P $400,000)has 2,000 Shares of Stock