Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000). Berta is Julian's sister, and Maria is Julian's aunt. Caramel Corporation redeems all of Julian's stock for $420,000 . Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel's board of directors after the redemption. With respect to
the redemption:
a. Dividend income of $340,000.
b. Dividend income of $420,000.
c. Long-term capital gain of $340,000.
d. Long-term capital gain of $420,000.
e. None of the above.
c
RATIONALE: The redemption is a complete termination redemption of § 302(b)(3) and qualifies for sale or exchange treatment. Julian is not deemed to own any of the stock owned by his sister, Berta, or his aunt, Maria. Family attribution under § 318 is limited to one's spouse, children, grandchildren, and parents. Julian therefore has completely terminated his interest in Caramel Corporation. (Since Julian is not deemed to own the stock of his sister or aunt, his continued employment with Caramel is not relevant.) Thus, Julian has a long-term capital gain of $340,000 [$420,000 (amount realized) – $80,000 (stock basis)].
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