Fifteen years ago, Mr. and Mrs. Boyer created Brovo, a regular corporation, through which to operate a service business. The Boyers own all of Brovo’s 1,000 shares of stock with a $1.6 million aggregate tax basis. The corporate business has been extremely successful; at the beginning of the year, Brovo’s balance sheet reflected over $2 million retained earnings. According to a recent appraisal, its stock is worth $2.5 million. The Boyers want to withdraw $500,000 cash from Brovo for their per-sonal use, but they do not want Brovo to pay them a dividend. Instead, they plan to have Brovo distribute $500,000 in exchange for 200 shares of their stock. The Boyers believe that they will recognize a $180,000 gain on this redemption, which will qualify as capital gain. Are the Boyers correct in their analysis of the tax consequences of the redemption?
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