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Calvin owns 40% of the outstanding shares of Copernicus Corp., which has accumulated earnings and profits...

Calvin owns 40% of the outstanding shares of Copernicus Corp., which has accumulated earnings and profits of $100,000 as of December 31, Year 1. The outstanding shares not owned by Calvin are owned by parties unrelated to Calvin. On January 1 of Year 2, Calvin, wishing to pursue another business opportunity, sells his stock back to Copernicus Corp. Copernicus distributes cash of $250,000 in redemption of all of Calvin's stock. If Calvin's adjusted basis for the stock on the date of redemption is $125,000, what will be the tax effect of the redemption to Calvin?

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A redemption of shares means repurchase of shares from the shareholder which is treatetd 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 and is substantially disproportionate, involves redemption of all of the shareholder’s stock, provided other shareholders are not related

Since this is a redemption of all of Calvin’s stock, and other shareholders are not

related, the gain, equal to the excess of the $250,000 distribution over the $125,000 basis, or$125,000, would be a capital gain.

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