Question

LO.8, 9 Broadbill Corporation (E & P of $650,000) has 1,000 shares of common stock outstanding. The shares are owned by the following individuals: Tammy, 300 shares; Yvette, 400 shares; and Jeremy, 300 shares. Each of the shareholders paid $50 per share for the Broadbill stock four years ago. In the current year, Broadbill Corporation distributes $75,000 to Tammy in redemption of 150 of her shares. Determine the tax consequences of the redemption to Tammy and to Broadbill under the following independent circumstances.

Answer 1

Question Continuation

Determine the tax consequences of the redemption to Tammy and to Broadbill under the following independent circumstances.

Tammy and Jeremy are grandmother and grandson.

Answer:

See Explanation Below

Explanation:

Given.

Tammy number of shares = 300

Yvette number of shares = 400

Jeremy number of shares = 300

Each of the shareholders paid $50 per share.

Tammy's Ownership is calculated by; (300+300)/1000

= 600)1000

= 60% ---- before redemption

Tammy's Ownership = (150 + 300)/850

Tammy's ownership = 450/850

Tammy's Ownership = 52.94% ---- after redemption

The constructive ownership of Tammy is more than 80%, this means that the distribution is considered as income to Tammy