My question is would Horace's tax liability on the $5000 gain on the sale of stock as ordinary income and subject to 37% tax or a long-term capital gain and taxed at 20%? Information Horace owns stock in Kumquat, Inc. Since the stock of Kumquat, a C-corporation, is not traded on an exchange, Kumquat must redeem the stock in order for shareholders to “sell” their stock. Kumquat has $1,000,000 in E&P. In 2022, Horace would like to redeem 700 of his 800 shares of stock. Thus, after the stock is redeemed, he would own 100 shares of stock. Kumquat has agreed to buy-back 700 shares of Horace’s stock for $40,000. Horace’s paid $50/share for his stock in 2000. Before this redemption, the stock in Kumquat is owned as follows: Horace 800 shares Elaine (Horace’s sister) 2,200 shares Clyde (Horace’s son) 600 shares Plum Partnership (Horace has a 10% interest) 800 shares Grape Corporation (Horace owns 60%) 800 shares Horace is in the 37% tax bracket.
My question is would Horace's tax liability on the $5000 gain on the sale of stock as ordinary income and subject to 37% tax or a long-term
Information
Horace owns stock in Kumquat, Inc. Since the stock of Kumquat, a C-corporation, is not traded on an exchange, Kumquat must redeem the stock in order for shareholders to “sell” their stock. Kumquat has $1,000,000 in E&P.
In 2022, Horace would like to redeem 700 of his 800 shares of stock. Thus, after the stock is redeemed, he would own 100 shares of stock. Kumquat has agreed to buy-back 700 shares of Horace’s stock for $40,000. Horace’s paid $50/share for his stock in 2000.
Before this redemption, the stock in Kumquat is owned as follows:
- Horace 800 shares
- Elaine (Horace’s sister) 2,200 shares
- Clyde (Horace’s son) 600 shares
- Plum
Partnership (Horace has a 10% interest) 800 shares - Grape Corporation (Horace owns 60%) 800 shares
Horace is in the 37% tax bracket.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
