Question

Broadbill Corporation (E & P of $650,000) has 1,000 shares of common stock outstanding. The shares are owned by the following individuals: Tammy, 300 shares; Yvette, 400 shares; and Jeremy, 300 shares. Each of the shareholders paid $50 per share for the Broadbill stock four years ago. In the current year, Broadbill Corporation distributes $75,000 to Tammy in redemption of 150 of her shares. Determine the tax consequences of the redemption to Tammy and to Broadbill under the following independent circumstances. a. Tammy and Jeremy are grandmother and grandson. b. The three shareholders are siblings.

Answer 1

a

In this case Tammy is deemed to hold shared held by broadbill.

His ownership before redemption = (300+300)/1,000 = 60%

After redemption = (150+300)/850 = 52.94%

His constructive ownership is not less than 80% of what it was before redemption, thus, the distribution is treated as dividend income.

Amount of $75,000 is treated as dividend income to tammy. For broad bill E&P reduces by $75,000.

b

When shareholders are siblings they are not deemed to own shares of others.

Ownership before redemption = 300/1000 = 30%

Ownership after redemption = 150/850 = 17.65%

Ownership after redemption is not more than 80% of what it was before redemption. Thus, the redemption qualifies as sale or exchange.

Tammy's non-taxable basis returned is $150*50 = $7,500

Capital gain = $75,000 - $7,500 = $67,500

For broadbill no tax consequences.