ExpertHard1 markMultiple Choice
CPA · Question 43 · Area 4: Entity Taxation
A C Corporation redeems 50% of Shareholder X's stock for 0,000. Shareholder X's basis in the redeemed stock was ,000. After the redemption, X owns 40% of the corporation (down from 60%). How is this transaction treated for Shareholder X?
A C Corporation redeems 50% of Shareholder X's stock for 0,000. Shareholder X's basis in the redeemed stock was ,000. After the redemption, X owns 40% of the corporation (down from 60%). How is this transaction treated for Shareholder X?
Answer options:
A.
Dividend of 0,000
B.
Sale or Exchange (Capital Gain of ,000)
C.
Dividend of ,000
D.
Sale or Exchange (Capital Gain of 0,000)
How to approach this question
Test for Sale treatment: 1. <50% ownership after? 2. <80% of prior ownership percentage? If yes -> Capital Gain. If no -> Dividend.
Full Answer
B.Sale or Exchange (Capital Gain of ,000)✓ Correct
The redemption qualifies as substantially disproportionate under §302(b)(2). Ownership went from 60% to 40%. 40% is less than 50%, and 40% is less than 80% of the starting 60% (48%). Thus, it is treated as a sale/exchange.
Common mistakes
Treating stock redemptions automatically as dividends.
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