Yolanda owns 60% of the outstanding stock of Amber Corporation. In a qualifying stock redemption, Amber distributes $20,000 to Yolanda in exchange for one-half of her shares (basis of $35,000). As a result of the redemption, Yolanda has a recognized capital loss of $15,000.

Question

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In a qualifying stock redemption, the basis of the stock is important for determining gain or loss. However, losses on sales or exchanges of stock to the corporation are generally not recognized if the transaction qualifies as a redemption of stock. The IRS typically treats such losses as capital losses, but they are disallowed in transactions that are essentially equivalent to a dividend or do not significantly change the shareholder's interest in the corporation. Since Yolanda still retains a significant interest in Amber Corporation, her loss would likely be disallowed under these rules.

Yolanda Owns 60% of the Outstanding Stock of Amber Corporation