Rare Corporation has accumulated E&P of $2,000,000.  The corporation has 1,000 shares of common stock outstanding and owned by unrelated parties as follows:  Julie, 500 shares and Jim, 500 shares.  Julie and Jim each paid $200 per share for Rare stock 15 years ago.  At the end of the year, Rare distributes securities (fair market value $250,000 and adjusted basis of $140,000) to Julie in redemption of 200 share of her stock. 

1. How much tax will Julie owe as a result of the redemption?  Assume Julie is in the 37% tax bracket.

2. What impact does this redemption have on the tax liability of Rare Corporation (if any)?

3. Would your answer for Julie be different if Julie and Jim were husband and wife?  Explain how this relationship would (or would not) affect the tax treatment of the redemption.

Answer rating: 100% (QA)

Answer Here when cash is paid to redeem stock it has n... View the full answer