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 $600 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

So, first case - non-taxable event

Jeff purchased 550 shares of MDC at $600/share.

So, his total purchase price for 450 shares = 450*$600 = $270,000

Jeff sold 450 shares at $1,000/share.

So, his total sales prices for 450 share = 450*$1,000 = $450,000

His realized gain = $450,000-$270,000 = $180,000

As tax rate is 0%, recognized gain = $180,000

The character of this gain = Capital gain.

So, first case - taxable event

Jeff purchased 550 shares of MDC at $600/share.

So, his total purchase price for 450 shares = 450*$600 = $270,000

Jeff sold 450 shares at $1,000/share.

So, his total sales prices for 450 share = 450*$1,000 = $450,000

His realized gain = $450,000-$270,000 = $180,000

Assuming tax rate @ 10%.

His recognized gain = $180,000-$18,000 = $162,000

The character of this gain = Capital gain.

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