Question

Assumptions: X is owned entirely by two individuals, A and B (who are unrelated unless otherwise stated). A owns 60 shares of X common stock (bought in one transaction for $600). B owns 40 shares of X common stock (with a basis of $30 per share). The stock’s FMV is $20 per share. X’s E&P is $500; X used the accrual method of accounting. What are the results to the parties from the alternative transactions (i.e., the amount and character of shareholder income and loss and the E&P impact)?

1. A sells 10 X shares to B for $200. Alternatively, what should A do if 50 of A’s shares have a $10 per share basis and the other 10 shares have a $20 per share basis? Are there any circumstance in which this sale could be redemption?
2. A sells 30 shares back to X for $600.
3. A sells 20 shares back to X for $400.
4. What would result to B if X redeems 10 of B’s shares for $200? What is the minimum number of shares that B must have redeemed to ensure sale or exchange treatment?
5. A sells 10 shares to X for $200.
   1. Alternative: A is a corporation.

Answer 1