Ethel, Hannah, and Samuel, unrelated individuals, own the stock in Broadbill Corporation (E & P of $700,000) as follows: Ethel, 300 shares? Hannah, 300 shares? and Samuel, 400 shares. Broadbill redeems 200 of Samuel's shares (basis of $175,000) for $250,000. If Samuel's stock is a capital asset and has been held for over three years, Samuel has:
A) A long-term capital gain of $75,000.
B) A short-term capital gain of $75,000.
C) Ordinary income of $250,000.
D) Ordinary income of $75,000.
E) None of the above.

Question

Quizplus · Accepted Answer

When a shareholder's stock is redeemed, the transaction is treated as a sale or exchange of the redeemed shares. Samuel's basis in his 400 shares before the redemption was $175,000/400 = $437.50 per share, and after the redemption it will be $175,000/200 = $875 per share. Therefore, his recognized gain is the excess of the redemption price over his adjusted basis in the redeemed stock, or ($250,000 - $87,500) = $62,500. Since the redeemed stock was held for over three years and is a capital asset, the recognized gain is long-term capital gain. Thus, the correct answer is A.

Ethel, Hannah, and Samuel, Unrelated Individuals, Own the Stock in Broadbill