Beige,Inc.,has 3,000 shares of stock authorized and 1,000 shares outstanding.The shares are owned by Sam (600 shares)and Lois (400 shares).Sam's adjusted basis for his stock is $60,000 and Lois' adjusted basis for her stock is $40,000.Beige's earnings and profits are $300,000.Beige redeems 200 of Lois' shares for $100,000.Determine the amount of Lois' recognized gain (1)if she is Sam's mother and (2)if they are unrelated.
A)$0 and $0.
B)$100,000 and $60,000.
C)$100,000 and $80,000.
D)$100,000 and $100,000.
E)None of the above.

Question

Quizplus · Accepted Answer

If Lois is Sam's mother,then she constructively owns the stock that Sam owns.Therefore,she is deemed to own all the stock of Beige both before and after the stock redemption.The $100,000 distribution is treated as a dividend.If Lois and Sam are unrelated,the distribution qualifies as a stock redemption under § 302(b)(2); that is,a substantially disproportionate distribution.Lois owned 40% of the stock before the redemption and only 25% (200 shares/800 shares)after the redemption.Therefore,she has a recognized gain of $80,000 [$100,000 - (50% F1F1F1S1F1F1F10 $40,000)].

Beige,Inc,Has 3,000 Shares of Stock Authorized and 1,000 Shares Outstanding