Leon owns 750 shares of the 2,000 outstanding shares of Crane Corporation (E & P of $900,000). None of the other shareholders of Crane are related to Leon. Leon acquired his Crane shares ten years ago for $80,000. Crane has operated several trades or businesses for more than five years. In the current year, Crane sells the assets of one of those trades or businesses and distributes the proceeds from the asset sale to the shareholders in a pro rata stock redemption. In this transaction, Leon receives $250,000 in redemption of 300 shares of Crane. As a result of this transaction, Leon will recognize:
A) $218,000 dividend income.
B) $250,000 dividend income.
C) $218,000 long-term capital gain.
D) $250,000 long-term capital gain.
E) None of the above.

Question

Quizplus · Accepted Answer

Leon has held the shares for more than 5 years and the stock redemption is treated as a sale of stock back to the corporation. The amount realized by Leon from the redemption is $250,000 ($833.33 per share), which exceeds his basis of $106,666.67 ($80,000 cost + $26,666.67 share of E&P). Therefore, Leon will recognize a long-term capital gain of $143,333.33 ($250,000 amount realized - $106,666.67 basis). The redemption is not treated as a dividend because it arose from the sale of assets and did not exceed E&P, and it is not taxable as a dividend to the extent of Leon's basis in the redeemed shares.

Leon Owns 750 Shares of the 2,000 Outstanding Shares of Crane