Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000). Berta is Julian's sister, and Maria is Julian's aunt. Caramel Corporation redeems all of Julian's stock for $420,000. Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel's board of directors after the redemption. With respect to the redemption:
A) Dividend income of $340,000.
B) Dividend income of $420,000.
C) Long-term capital gain of $340,000.
D) Long-term capital gain of $420,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Julian's shares were redeemed for $420,000, which is greater than his original cost of $200 per share, resulting in a capital gain of $220 per share. Julian owned 400 shares, so his capital gain is $88,000. Since Julian had held the stock for more than one year, it is considered a long-term capital gain. This gain is allocated to Julian's remaining ownership in the corporation, so Berta and Maria are not taxed on this redemption. Thus, the correct answer is long-term capital gain of $340,000.

Julian, Berta, and Maria Own 400 Shares, 400 Shares, and 200