Veronica and Tracy, Unrelated Individuals, Own All the Stock in Beige

question 15

Multiple Choice

Veronica and Tracy, unrelated individuals, own all the stock in Beige Corporation as equal shareholders. Each has a basis of $20,000 in her 20 shares. Beige Corporation has accumulated E & P of $900,000. Veronica wishes to retire in the current year and wants to sell her stock for $500,000, the fair market value. Tracy would like to purchase Veronica's shares and, thus, become the sole shareholder in Beige Corporation. However, because Tracy is short of funds, Beige Corporation redeems all of Veronica's shares for $500,000. Which of the following is a correct statement regarding the tax consequences of this redemption?

• A) Tracy will have dividend income of $500,000.
• B) Veronica will have a capital gain of $480,000.
• C) Veronica will have dividend income of $500,000.
• D) Beige Corporation will not reduce its E & P as a result of the redemption.
• E) None of these.

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Definitions:

Deferred annuity

A financial instrument that defers payments to the investor until a predetermined time.

Ordinary annuity

A series of equal payments made at the end of consecutive periods over a specified length of time.

Deferred annuity

An insurance product that provides future payments to the holder, typically starting at retirement, in exchange for current premiums or a lump sum payment.

Ordinary annuity

A regular annuity involves uniform payments disbursed at the end of each period within a set timeframe.