Private Corporation redeems some of its stock from Jane, a major shareholder. Before the redemption Jane owns 50 of the 100 outstanding shares, and her daughter Jill owns 40 shares. The remaining ten shares are owned by unrelated individuals. Private redeems for $600,000 in cash 40 of Jane’s shares, having a $200,000 basis. Private has $900,000 of current and accumulated E&P. Jane’s basis in her remaining ten shares is $50,000.
a. What are the tax consequences of the redemption to Jane?
b. What is Jane’s basis in her remaining ten shares after her 40 shares are redeemed?
c. How would your answers to Parts a and b change if Jane and Jill were not related?