1. Kimye Corporation (E & P of $700,000) has 1,000 shares of stock outstanding. Stewart owns 400 shares, Lupe (Stewart's daughter) owns 400 shares, and the remaining 200 shares are owned by unrelated individuals. In an effort to raise funds for another investment, Stewart convinces Kimye to redeem all of his shares for $380,000. Stewart acquired the stock seven years ago for $60,000. After the redemption, Stewart continued to serve as Kimye's president. As a result of the transaction, Stewart must recognize:
A. $320,000 long-term capital gain.
B. $380,000 dividend income.
C. $380,000 long-term capital gain.
D. $320,000 dividend income.
2. R Corporation has 500 shares of stock issued and outstanding, owned equally by the shareholders, A, B, C, D, and E. On July 20 of the current year, when E&P is $10,000, R Corporation redeems 100 shares from A, 60 shares from B, and 40 shares from C. The redemption price was $80 per share and the basis to all the shareholders was $50 per share. Assume that none of the shareholders are related. What is the tax effect to B of the redemption?
a. $1,800 dividend
b. $1,800 capital gain
c. $4,800 capital gain
d. $4,800 dividend
e. None of the above is correct.
3. Meadowlark Corporation has 1,000 shares of stock outstanding. Harvey owns 400 shares, Gabriella (Harvey's sister) owns 400 shares, and Black Partnership owns 200 shares. Harvey is a 50% partner of Black Partnership. In applying the § 318 attribution rules:
a. Black Partnership owns 300 shares.
b. Gabriella owns 800 shares.
c. Harvey owns 500 shares.
d. Harvey owns 900 shares.
e. Harvey owns 600 shares.
4. 400 shares, Lupe (Jaime's daughter) owns 400 shares, and the remaining 200 shares are owned by unrelated individuals. In an effort to raise funds for another investment, Jaime convinces Flamingo to redeem all of his shares for $380,000. Jaime acquired the stock seven years ago for $60,000. After the redemption, Jaime continued to serve as Flamingo's controller but Gabriella assumed his role as a member of the corporation's board of directors. As a result of the transaction, Jaime must recognize:
a. $320,000 long-term capital gain.
b. $380,000 dividend income.
c. $380,000 long-term capital gain.
d. $320,000 dividend income.
e. None of the above.