Question

Coleman Corporation (E&P of $720,000) has 3,000 shares of common stock outstanding. Fred owns 1,500 shares and his wife, Angelia, owns 1,500 shares. Fred and Angelia each have a basis of $90,000 in their Coleman Corporation stock. In the current year, Coleman Corporation redeems 1,000 shares from Fred for $250,000. With respect to the distribution in redemption of Fred's stock in Coleman Corporation:

Group of answer choices

Fred has dividend income of $250,000.

Fred has a capital gain of $190,000

Fred has a $30,000 basis in his 500 remaining shares.

Coleman Corporation has a $240,000 reduction in E&P.

Answer 1

SInce the common stock are redeemed in the corporation Hence the three follwing transactions will happen

1. Fred Shares will reduce

2. Fred will have capital gain or loss as the case may be

3. Corporation's E&P will either increase or reduce.

In the present case

For Fred

Fred has 1500 shares at 60 per share out of which 1000 are going to be redeemed at 250000 overall hence the calculation of capital gain is as follows:

1000 Shares Redeemed	250000
Less : Initial Amount Paid(1000*60)	60000
Capital Gains	190000

He will be Left with 500 shares at $ 30000 Basis

For Coporation

Corporation will redeem 1000 Common stock of 10 per stock at 250 per stock, hence they are paying at 240 Rs Extra for each stock hence its Earnings & profits are going to hit by $ 2,40,000 i.e 1000*240

Hence from the given 4 choices, 3 are selected to be the part of answer

Fred has a Capital Gain of $1,90,000.

Fred has a $30,000 basis in his 500 remaining shares.

Coleman Corporation has a $240,000 reduction in E&P