Question

# Dan owns 50 of 100 shares of stock in ABC Corporation. ABC owns 100% of DEF...

Dan owns 50 of 100 shares of stock in ABC Corporation. ABC owns 100% of DEF Inc. DEF owns 40 of 100 shares of GHI Corporation. Dan owns 60 shares of GHI. What is the tax effect if GHI redeems the 60 shares of GHI that Dan owns for \$200 (assume Dan is in a 39% tax bracket)? How would your answer change if Dan owned no shares in ABC, but his son owns 50 shares of ABC?

Dan owns 50 shares of ABC

ABC owns 100 of DEF

DEF owns 40 of GHI

ie 100% of DEF ie 50% of ABC

Therefore shares of GHI is equal to 50*100/40 = 125 .

Out of this 125 , 40 belongs to DEF and 60 belongs to DAN.

Taxability

(1) Premium on redemption shall be treated as capital gain.

\$200 shall be liable to tax subject to reduction of an amount equivalent to Nominal value of the said number of shares.

(2) In case second, ie whether son of Dan owns the said shares, he is not liable to taxable for the shares

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