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Shonda owns 1,000 of the 1,500 shares outstanding in Rook Corporation (E & P of $1,000,000). Shonda paid $50 per share for the stock seven years ago. The remaining stock in Rook is owned by unrelated individuals. a. What are the tax consequences to Shonda when Rook Corporation redeems 450 shares of Shonda's stock for $225,000?

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Answer:

Explanation:

1. Shonda owns 52.4% of the Rook shares outstanding after the redemption. YES

2. Shonda has $225,000 of dividend income. YES

3. Shonda's basis in the 450 shares redeemed attaches to the basis in the remaining Rook shares. YES

4. The transaction qualifies as a not essentially equivalent redemption. NO

5. Shonda has a $225,000 basis in the remaining 550 shares. NO