Since Garnet Corporation was formed five years ago, its stock has been held as follows: 525 shares by Frank and 175 shares by Grace. 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.
Since Garnet Corporation was formed five years ago, its stock has been held as follows: 525 shares by Frank and 175 shares by Grace. 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.
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What are the tax consequences of the stock redemption to Frank and Grace? Be sure to review Chapter 6 on stock redemptions.
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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)?
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What factors should influence their decision on whether to redeem or sell the 250 shares of stock?
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