Kingbird Corporation (E & P of $800,000) has 1,000 shares of stock outstanding. That stock is held by Amata (550 shares) and Esteban (450 shares), who are unrelated individuals. Kingbird redeems 200 of Amata's shares for $1,000 per share. Amata paid $300 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

When a shareholder sells stock back to the corporation, the transaction can be treated as either a dividend or a capital gain. In this case, since Amata sold her shares for more than she paid for them, it would be classified as a capital gain. The calculation for Amata's capital gain would be:

Sale proceeds = $1,000 x 200 shares = $200,000
Cost basis = $300 x 200 shares = $60,000
Capital gain = $200,000 - $60,000 = $140,000

Therefore, option B is correct. Option A is incorrect because Amata did not receive a dividend. Option C is incorrect because Amata's basis in her remaining shares would be adjusted according to the redemption rules. Option D is incorrect because Kingbird's E&P would only be reduced by the amount of the redemption, which is $200,000 in this case.

Kingbird Corporation (E & P of $800,000) Has 1,000 Shares