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Since Garnet Corporation was formed five years ago, its stock has been held as follows: 525...

Since Garnet Corporation was formed five years ago, its stock has been held as follows: 525 shares by Frank and 175 shares by Grace. Their basis in the stock is $350,000 for Frank and $150,000 for Grace. As part of a stock redemption, Garnet redeems 125 of Frank's shares for $175,000 and 125 of Grace's shares for $175,000. Round any division to six decimal places. Round your final answer to the nearest dollar.

a. What are the tax consequences of the stock redemption to Frank and Grace? Grace has a recognized long-term capital gain of $ , and Frank has dividend income of $ 175,000 .

b. How would the tax consequences to Frank and Grace be different if, instead of the redemption, they each sold 125 shares to Chuck (an unrelated party)? Carry out any division to seven decimal places. Then round your answer to the nearest dollar. Grace will have a recognized long-term capital gain of $ , and Frank will have a recognized long-term capital gain of $ .

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a) What are the tax consequences of the stock redemption to Frank and Grace? Grace has a recognized long-term capital gain of $ , and Frank has dividend income of $ 175,000

there are two possible treatments for the stock redemption, dividend treatment and stock sale treatment. Dividend treatment  will increase the amount of taxes to be paid because the stock redemption is treated as a taxable dividend. on the other hand, in the stock sale treatment, only part of the redemption payment is taxable because a long-term capital gain can be recognized equal to the excess of the redemption payment over the tax basis of the redeemed shares.

As Fran recognised the redemption as dividend, he will have to pay taxes based on the entire amount of payment ($175,000.00).

As grace recognized a long-term capital gain, she will only have to pay taxes based on the excess of payment she received, and might also be sbject to a more favorable tax rate. Grace long term capital gain =67,857.14

to get the value of grace shares
basis stock/ amount of shares
150000/175= 857.142857 per share
value of the sale per share
payment/amount of redeemed shares
175000/125= 1400
real value of shares
amount of shares redeemed * value of shares
125*857.142857= 107142.857
long term capital gain
payment -real value of shares
175000-107142.857      67,857.14

b) How would the tax consequences to Frank and Grace be different if, instead of the redemption, they each sold 125 shares to Chuck (an unrelated party)? Carry out any division to seven decimal places. Then round your answer to the nearest dollar. Grace will have a recognized long-term capital gain of $ , and Frank will have a recognized long-term capital gain of $ .

in this scenario, both of them would only pay taxes based on the capital gain resulting from the sale.

For grace, the capital gain would be the same as on part A :$657,857

For frank, the capital gain would be $91,667

  
to get the value of frank shares
basis stock/ amount of shares
350000/525=          666.6666667 per share
value of the sale per share
payment/amount of redeemed shares
175000/125= 1400
real value of shares
amount of shares redeemed * value of shares
125*666.666667=    83,333.3333750
long term capital gain
payment -real value of shares
175000-83333.3333750               91,666.67

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