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Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with...

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with a basis of $6,600, and Clyde owns the remaining 40 shares with a basis of $15,000. At year-end, Getaway is considering different alternatives for redeeming some shares of stock. Evaluate whether each of the following stock redemption transactions will qualify for sale and exchange treatment.

a. Getaway redeems 10 of Bonnie’s shares for $5,000. Getaway has $26,000 of E&P at year-end and Bonnie is unrelated to Clyde.

Bonnie owns 60% before the redemption and		%	after the redemption.
Does this qualify as a sale or exchange?		If so, how much is the gain?

b. Getaway redeems 29 of Bonnie’s shares for $10,000. Getaway has $26,000 of E&P at year-end and Bonnie is unrelated to Clyde.

Bonnie owns 60% before the redemption,		%	after the redemption.
Does this qualify as a sale or exchange?		If so, how much is the gain?

c. Getaway redeems 8 of Clyde’s shares for $5,500. Getaway has $26,000 of E&P at year-end and Clyde is unrelated to Bonnie.

Bonnie owns 60% before the redemption,		%	after the redemption.
Does this qualify as a sale or exchange?		If so, how much is the gain?

Solutions

Expert Solution

Cost per share

Bonnie = $6600/60 =$110/shares

Clyde = $15000/40 = $375/share

Particulars	Gateway Total	Bonnie	Clyde
No of Shares Issued - Begining	100	60	40
Redemption	10	10	-
Remaining	90	50	40

Hence, Bonnie's holding after redemption = 50/90 x 100 = 55.56%

This would qualify for sale

Sale Proceed = $5,000

Cost Basis ($110x10) = ($1,100)

Gain = $3,900

Particulars	Gateway Total	Bonnie	Clyde
No of Shares Issued - Begining	100	60	40
Redemption	29	29	-
Remaining	71	31	40

Hence, Bonnie's holding after redemption = 31/71 x 100 = 43.66%

This would qualify for sale

Sale Proceed = $10,000

Cost Basis ($110x29) = ($3,190)

Gain = $6,810

Particulars	Gateway Total	Bonnie	Clyde
No of Shares Issued - Begining	100	60	40
Redemption	8	-	8
Remaining	92	60	32

Hence, Bonnie's holding after redemption = 60/92 x 100 = 65.22%

This would qualify for sale

Sale Proceed = $5,500

Cost Basis ($375x8) = ($3,000)

Gain = $2,500

ekkarill92 answered 1 year ago

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