Rodolfo makes a gift of § 306 stock (basis of $75,000, fair market value of $100,000) in Kiwi Corporation to his daughter, Josie. When the stock was issued to Rodolfo, his share of Kiwi Corporation's E & P was $80,000. When its E & P is $200,000, Kiwi Corporation redeems all of Josie's stock for $100,000. With respect to the stock redemption:

Question

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When Kiwi Corporation redeems Josie's stock for $100,000, Josie will recognize dividend income equal to the lesser of the amount received ($100,000) or her share of the corporation's E & P ($80,000). Therefore, Josie will recognize dividend income of $80,000. The redemption does not affect Kiwi Corporation's E & P. Josie does not recognize a capital gain because her basis in the stock is less than the amount received in the redemption.

Rodolfo Makes a Gift of § 306 Stock (Basis of $75,000