Leon owns 400 shares of the 1,000 outstanding shares of Crane Corporation (E & P of $650,000). None of the other shareholders of Crane are related to Leon. Leon acquired his Crane shares ten years ago for $60,000. Crane has operated several trades or businesses for more than five years. In the current year, Crane sells the assets of one of those trades or businesses and distributes the proceeds from the asset sale to the shareholders in a pro rata stock redemption. In this transaction, Leon receives $180,000 in redemption of 250 shares of Crane. As a result of this transaction, Leon will recognize:

Question

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Leon will recognize a long-term capital gain of $142,500 [$180,000 amount realized (proceeds from redemption) - $60,000 adjusted basis (original cost of shares) = $120,000 gain, which is a long-term capital gain because Leon held the shares for more than one year]. The distribution is treated as a redemption under Sec. 302(b)(1) because it was pro rata. Under Sec. 302(b)(2), when a shareholder's entire interest in the corporation is redeemed, the transaction will be treated as a sale of stock; however, Leon retains some shares, so that rule does not apply here. Under Sec. 301(c), the distribution will be treated as a dividend to the extent it is made out of the corporation's current or accumulated E&P. However, the distribution is not deemed to be a dividend to the extent it exceeds E&P (i.e., it would be treated as return of capital). In this case, the distribution does not exceed E&P, so the entire $180,000 will be treated as a dividend.

Leon Owns 400 Shares of the 1,000 Outstanding Shares of Crane