Julian, Berta, and Maria Own 400 Shares, 400 Shares, and 200

question 116

Multiple Choice

Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000) . Berta is Julian's sister, and Maria is Julian's aunt. Caramel Corporation redeems all of Julian's stock for
$420,000. Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel's board of directors after the redemption. With respect to the redemption:

• A) Dividend income is $340,000.
• B) Dividend income is $420,000.
• C) Long-term capital gain is $340,000.
• D) Long-term capital gain is $420,000.
• E) None of these.

---

Definitions:

Separate Office Staff

The action or policy of maintaining distinct administrative or clerical staff for different departments or functions.

Decentralization

The transfer of control and decision-making from a centralized entity to local or individual authorities.

Advantage

A condition or circumstance that puts a company or situation in a favorable or superior position compared to competitors.

Transfer Price

The price at which divisions of a company transact with each other, such as the exchange of supplies or labor between departments.