A. MDC Corporation (E & P of $800,000) has 1,000 shares of stock outstanding. Th

Question

A. MDC Corporation (E & P of $800,000) has 1,000 shares of stock outstanding. That stock is held by Jeff (550 shares) and Thomas (450 shares), who are unrelated individuals. Bell redeems 450 of Jeff’s shares for $1,000 per share. Jeff paid $800 per share for his Bell stock nine years ago. This is a qualified redemption. What is Jeff’s realized gain/ loss? What is his recognized gain/ loss? What is the character of the recognized gain/ loss? B: See the above problem: assume this is a taxable event and not a qualified redemption: What is Jeff’s realized gain/ loss? What is his recognized gain/ loss? What is the character of the recognized gain/ loss?

Explanation / Answer

(1) Purchase cost of Shares by Jeff = $ 800 * 450 shares = $ 360,000 Redemption value of Shares received by Jeff = $ 1000 * 450 shares = $ 450,000 Jeff's realized gain = $ 450,000 As the redemption is qualified redemption, Capital gain = $ 450,000 - $ 360,000 = $ 90,000 Hence, Jeff's recognized gain = $ 90,000 Here, tax will be calculated on the amount of $ 90,000 only as capital gain tax Character of the recognized gain/loss is Long-term Capital gain (2) As the redemption is not qualified redemption, the amount received on redemption will be taxed accordingly on the full redemption value of $ 450,000. Redemption value received = $ 450,000 Hence, Jeff's recognized gain = $ 450,000 Jeff's realized gain = $ 450,000 Character of the recognized gain/loss is dividend.

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