C12-Chp-06-2-HW-Sol-Redeem-Liquid-EXCEL-2012

C12-Chp-06-2-HW-Sol-Redeem-Liquid-EXCEL-2012 - 1. Stk...

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1. Stk Redemption d2a487aad40889f6bd5f52f1c391b27f9704d57a.xls Page 1 of 4 No. Ans 1 B R Corporation - Dividend vs. Redemption Treatment 2 C Big Corporation Stock Redemptions: Dividend vs. Redemption Treatment Big Corp. redeems 10% of stock of owner Treat entire amount as dividend 3 D Beaver Corporation- Stock Redemption Earnings and profits $300,000 Ward will receive a distribution of: $450,000 Ward's adjusted basis in the stock $250,000 Capital gain on redemption $200,000 This is a complete termination of his interest. 4 A Stock Redemption: Smith and Jones Redeem 50 of 90 shares owned by Jones. Smith owns other 10% Amount paid to Jones-Per share $300 Number of shares redeemed 50 Total amount paid to Jones $15,000 Basis of stock redeemed $5,000 Shares before % Ownership Shares after % Ownership Jones 90 90% 40 80% Smith 10 10% 10 20% Total 100 50 Jones does not end up owning less that 80% of the percentage ownership before the redemption. Jones also does not end up owning less that 50% of the company. Beginning ownership percentage for Jones 90% Ending ownership percentage for Jones 80% To get exchange treatment, Jones would need to own less than 72% (80% of 90%) to meet one test and would need to own less than 50% of corp. to meet second test. This is a dividend under Sec. 301 - does not meet requirements of Sec. 302 or 303(a). 5 D Stock Redemptions: Dividend vs. Redemption Treatment Shares before % Ownership Shares after % Ownership Jones 70 70% 20 40% Smith 30 30% 30 60% Total 100 50 This meets the two tests of Sec. 302(b)(2). This is an exchange, not a dividend. Selling price $15,000 Cost 5,000 Capital gain $10,000 6 A Redemption to pay death taxes Gets exchange treatment because it meets requirements of Sec. 303(a) and (b). Sec. 303(a). The amount of the distribution does not exceed death taxes.
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This note was uploaded on 03/09/2012 for the course ACCT 6120 taught by Professor Godfrey,h during the Spring '08 term at UNC Charlotte.

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C12-Chp-06-2-HW-Sol-Redeem-Liquid-EXCEL-2012 - 1. Stk...

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