Julio Inc. is a shareholder of Gray Corporation and is in the 34% tax bracket. I

ID: 2539248 • Letter: J

Question

Julio Inc. is a shareholder of Gray Corporation and is in the 34% tax bracket. It acquired 2,000 shares of stock in Gray Corporation seven years ago at a cost of $50 per share. In the current year, Julio, Inc. received a payment of $150,000 from Gray Corporation in exchange for 1,000 of its shares in Gray. Gray has E & P of $1,000,000.

Assume that Julio has no capital losses.

If the stock ownership in Gray Corporation represented a 25% interest, what income tax liability would Julio incur on the $150,000 payment in each of the following situations?

b. If the payment does not qualify for stock redemption sale or exchange treatment, the tax liability for a corporate shareholder would be

Explanation / Answer

a. Computation of Income tax liability of Julio:

Details

Amount

Amount received for exchange of shares

$150,000

Less: Basis amount in the 1,000 shares redeemed (1,000shares*$50)

(50,000)

Long term capital gain

$100,000

Tax rate on long term capital gain

15%

Tax liability ($100,000*15%)

$15,000

b. If the payment does not qualify for stock redemption sale or exchange treatment, then the amount will be treated as dividend received:
Tax liability = $150,000 *15% = $22,500