Golden purchased 500 shares of Silver, Inc. 15 years ago for $25,000. Golden has worked as an owner/employee and owned 40% of the company throughout this time. This year, Silver, which is not an S corporation, redeemed 100% of Golden’s stock for $200,000. What is the treatment and amount of income or gain that Golden should report?
A. $0
B. $175,000 long-term capital gain.
C. $175,000 ordinary income
D. $200,000 long-term capital gain
Answer:B
This answer is correct. The requirement is to determine the treatment of Golden’s stock redemption. A stock redemption qualifies for exchange treatment generally resulting in capital gain or loss if the redemption is a partial liquidation, or reduces the shareholder’s interest in the corporation and after the redemption the shareholder owns (directly and constructively) less than 50% of the corporation’s stock. Here, since the redemption completely terminated Golden’s stock ownership and he had held his stock for more than one year, the redemption results in a long-term capital gain of $200,000 — $25,000 = $175,000.