Since Garnet Corporation was formed five years ago, its stock has been held as follows: 525 shares by Frank and 175 shares by Grace. Their basis in the stock is $350,000 for Frank and $150,000 for Grace. As part of a stock redemption, Garnet redeems 125 of Frank's shares for $175,000 and 125 of Grace's shares for $175,000.
a. What are the tax consequences of the stock redemption to Frank and Grace?
b. How would the tax consequences to Frank and Grace be different if, instead of the redemption, they each sell 125 shares to Chuck (an unrelated party)?
c. What factors should influence their decision on whether to redeem or sell the 250 shares of stock?