Question

Amy owns 500 shares of Dalek Corporation with a stock basis of $50,000. Total outstanding shares of Dalek Corporation are 1,000. Of the remaining 500 shares, 50 shares are owned by River (her daughter), and the remaining 450 shares of Dalek Corporation are owned by an unrelated shareholder. Dalek Corporation has E&P of $640,000.

What are the tax consequences to Amy if in a stock redemption; Dalek redeems 100 shares from Amy for $30,000?

What are the tax consequences to Amy if in a stock redemption; Dalek Corporation redeems 400 shares from Amy for $80,000?

What are the tax consequences to Amy if in a complete termination of her 500 shares; Dalek distributes $140,000 to Amy?

If you were advising Amy between the scenarios listed in part a-c above, which scenario would you advise Amy to proceed with? Amy wishes to pay the least amount of tax and has $150,000 of capital loss from other investments.  

Answer 1

• Amy have 500 shares worth $ 50,000 i.e. @ 100 each.
• Now Amy redeems 100 shares worth $ 30,000 i.e. 300 each share. The tax consequences $ 20,000 (Because his own values for 100 shares is $ 10,000 & redeems 100 share in $ 30,000) So, difference will be taxable.
• Here Dalek Corporation reddems 400 share worth $ 80,000 i.e. 200 each share for Amy. So, the tax consequences $ 40,000 (Because his own values for 400 shares is $ 40,000 & redeems 400 share in $ 80,000) so, difference will be taxable for Amy.
• Here Dalek Corporation complete termination 500 share worth $ 1,40,000 i.e. 280 each share for Amy. But 50 shares of river. So, we will less $ 14,000 for 50 shares @ 280 each of River. The tax consequences $ 1,26,000.