Question

Peggy, Mildred and Shirley, sisters own thirty (30) shares, thirty (30) shares and forty (40) shares...

Peggy, Mildred and Shirley, sisters own thirty (30) shares, thirty (30) shares and forty (40) shares of stock, respectively, in Dorothy Corporation. Dorothy Corporation has Earning and Profits of $500,000. Dorothy Corporation redeems ten shares of Shirley's stock for $60,000. Shirley paid $300 a share for the stock five year ago. With respect to the redemption, which of the following are correct?

Shirley has taxable dividend income of $60,000.

Shirley has LT Capital Gain of $54,000

Shirley has taxable dividend income of $54.000

Shirley has LT Capital Gain of $60,000

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Answer #1

Ans:

Family owned corporatio attribution rules apply to sister concerns. For a privately owned C corporation, when stocks are redeemed it is assumed that after redemption stocks are still held by other members of family. In such case distribution is completely taxed as dividend and not considered as Capital Gain.

So Correct Answer is Option A.

Shirley has taxable dividend income of $60,000.

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