Shetland Corporation, a C corporation, has E&P of $1,000,000. The corporation stock is held as follows:

Matthew 1,000 shares

Aaron 1,000 shares

Fay 1,000 shares

Marlyebone Partnership 1,000 shares

Devon Corp. 1,000 shares

Total Shares 5,000 shares

Matthew would like to redeem 500 shares of stock. The fair market value of the stock is $200,000. Matthew acquired the stock 10 years ago and has a basis of $200/share in her stock. Note: Since Shetland Corporation is not traded on an exchange, Matthew does not have the option for selling his stock on an open market.

Here is additional information about Shetland Corporation:

• Aaron is Matthew’s first cousin
• Fay is Matthew’s mother
• Matthew owns 10% of Marlyebone Partnership
• Matthew owns 20% of the shares in Devon Corporation

1. Will this redemption of 500 shares of Matthew’s stock be treated as a qualified stock redemption or will it be treated as a distribution? Support your answer with calculations.
2. How much tax must Matthew pay if this transaction is treated as a qualified stock redemption? Matthew is an individual in the 37% tax bracket.
3. How much tax must Matthew pay if this transaction is treated as a distribution (i.e. this transaction is NOT a qualified stock redemption)? (Matthew does not have any additional capital transactions).
4. Matthew is still in the planning stage for this transaction. What would you recommend?

Answer rating: 100% (QA)

The redemption of 500 shares of Matthews stock will be treated as a distribution 500 shares x 200share 100000 1000001000000 10 Since Matthew owns 10 o... View the full answer