Question

Corporation Z is owned entirely by two individuals, C and D. C owns 60 shares of...

Corporation Z is owned entirely by two individuals, C and D. C owns 60 shares of Z common stock bought in one transaction for $1,200. D owns 40 shares of Z common stock with a basis of $60 per share. The stock’s fair market value is $40 per share. Z’s E&P is $1,000. C sells 60 shares to Z for $1,800. The following statements are with regard to C.

a.

The redemption will be given dividend treatment.
b.

The redemption will be given sale treatment under 302(b)(3), complete termination of interest.
c.

It is impossible to tell whether the transaction will be given sale or dividend treatment.
d.

None of the above.
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Answer #1

ANSWER

Correct option is B

The redemption will be given sale treatment under 302(b)(3), complete termination of interest.

Explanation:-

C owns 60 shares of Z common stock and sells back the entire stock to Z thus it terminates the interest in the corporation.

Sec. 302(b)(3) states when a stock redemption completely terminates the interest of a shareholder in the corporation, the redemption will be categorized as a sale

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