To carry out a qualifying stock redemption, Turaco Corporation (E & P of $800,000) transfers land held for investment purposes to Aida, a shareholder. The land had a basis of $250,000, a fair market value of $400,000, and is subject to a $300,000 liability. Aida has a basis of $70,000 in the shares redeemed. Which of the following is a correct statement regarding the tax consequences of this redemption?
A) Aida will have $400,000 of dividend income.
B) Aida will have a $100,000 basis in the land.
C) Turaco Corporation will recognize a gain of $50,000.
D) Aida will recognize a gain of $30,000.
E) None of the above.

Question

Quizplus · Accepted Answer

In a qualifying stock redemption, the shareholder receiving property in exchange for their stock has a taxable gain only to the extent that the fair market value of the property received exceeds their basis in the redeemed stock. In this case, Aida's basis in the redeemed stock is $70,000, and the fair market value of the land received is $400,000 minus the liability of $300,000, or $100,000. Therefore, Aida has a recognized gain of $30,000 ($100,000 - $70,000).

Choice A is incorrect because the fair market value of the property received is not considered dividend income.

Choice B is incorrect because Aida's basis in the land received is the fair market value minus any recognized gain on the redemption, which in this case is $100,000 minus $30,000, or $70,000.

Choice C is incorrect because Turaco Corporation's gain on the transfer of the land is $400,000 (fair market value) minus $250,000 (basis), or $150,000. However, this gain is not recognized because it is offset by the $300,000 liability assumed by Aida.

To Carry Out a Qualifying Stock Redemption, Turaco Corporation (E