Dave, Erica, and Faye Are All Unrelated

question 42

Essay

Dave, Erica, and Faye are all unrelated. Each has owned 100 shares of News Corporation stock for five years and each has a $180,000 basis in those 100 shares. News Corporation's E&P is $720,000. News redeems all 100 of Dave's shares for $300,000, their FMV.
a)What is the amount and character of Dave's recognized gain or loss? What basis do Erica and Faye have in their remaining shares? What effect does the redemption have on News's E&P?
b)Assuming instead that Dave is Erica's son, answer the questions in part (a)again.

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Definitions:

Committed Fixed Costs

Long-term fixed costs that cannot be easily altered in the short term, such as lease payments or insurance contracts.

Volume

The quantity or amount of something, often used in context with production, sales, or trading activities.

Mixed Cost

Expenses that have both variable and fixed components, varying with the level of production or sales to some degree.

Relevant Range

The range of activity or production level within which the assumed cost behavior patterns are valid, typically influencing fixed and variable costs.