Question

26. Julian, Berta, and Marta own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation $800,000). Berta is Julian's sister, and Maria is Julian's aunt. Caramel Corporation redeems all of Julian's stock $500,000. Julian paid $200 a share for the stock five years ago, Julian continued to serve on Caramel's board of directo after the redemption. What are the income tax consequences to Julian with respect to the redemption

Answer 1

Short Term Capital Gain = If you hold the shares for one year or less, than profit of that shares are called Short Term Capital Gain

Long Term Capital Gain = If you hold the shares for more than one year, than profit of that shares are called Long Term Capital Gain

Solution :-

Cost of Purchase for Julian = 400 shares * $200 = $80000

Redemption Value of Shares of Julian = $500000

Holding Period = 5 year

Profit / (Loss) on Redemption of Shares :-

= Redemption Value of Shares - Cost of Purchase of Shares

= $500000 - $80000

= $420000

Long Term Capital Gain of Julian = $420000