Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000). Berta is Julian's sister, and Maria is Julian's aunt. Caramel Corporation redeems all of Julian's stock for $420,000. Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel's board of directors after the redemption. With respect to the redemption:

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The redemption of Julian's shares is treated as a long-term capital gain since he held the shares for more than one year. The amount of the gain is the difference between the redemption price of $420,000 and the cost basis of $200,000 (400 shares x $200/share), which equals $220,000. Since Maria and Berta are not affected by the redemption, they do not have any taxable event related to it.

Julian, Berta, and Maria Own 400 Shares, 400 Shares, and 200