Hannah, Greta, and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah, 600 shares? Greta, 400 shares? and Winston, 1,000 shares. Greta is Hannah's daughter, and Winston is Hannah's brother. Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000. Hannah purchased the stock three years ago as an investment. With respect to the stock redemption, Hannah has:
A) Long-term capital gain of $185,000.
B) Long-term capital gain of $240,000.
C) Dividend income of $185,000.
D) Dividend income of $240,000.
E) None of the above.

Question

Quizplus · Accepted Answer

The redemption is treated as a sale or exchange because it is a substantial reduction in Hannah's interest in the corporation. The long-term capital gain is calculated as the redemption amount ($240,000) minus the basis of the shares ($55,000), resulting in a gain of $185,000.

Hannah, Greta, and Winston Own the Stock in Redpoll Corporation