Question

Jackson, an individual, is a shareholder in Cadduceus Corp., a C corporation with $40,000 in accumulated earnings and profits. Cadduceus Corp. redeems some of its stock from Jackson for $200,000 as part of a qualifying partial liquidation. Jackson’s adjusted basis in the stock at the time of redemption was $50,000. For tax purposes, how will Jackson report the effects of this redemption of stock?

• As a $40,000 dividend only.

• As a $150,000 capital gain.

• As a $40,000 dividend and $110,000 capital gain.

• As a $10,000 capital loss.

Answer 1

Answer:

Option B: As a $150,000 capital Gain

Explanation:

A redemption of shares, which is a repurchase of shares from the shareholder, is treated as a sale or exchange by the shareholder and generally results in a capital gain as long as the redemption is not essentially equivalent to a dividend; is substantially disproportionate; involves redemption of all of the shareholders’ stock, provided other shareholders are not related; is from a non-corporate shareholder in partial liquidation; or is a redemption of stock to pay death taxes under section 303. Since this is a redemption of shares from a non-corporate shareholder in partial liquidation, the gain, equal to the excess of the $200,000 distribution over the $50,000 basis, or $150,000, would be a capital gain.