Indigo Corporation: Qualifying Stock Redemption Transaction Analysis
Qualifying Stock Redemption Transaction for Indigo Corporation
Indigo Corporation wants to transfer cash of $286,000 or property worth $286,000 to one of its shareholders, Brianna, in a redemption transaction. The corporation will treat this transaction as a qualifying stock redemption. If Indigo chooses to distribute property, it will decide between two assets: Property A with a basis of $143,000 and Property B with a basis of $371,800, both valued at $286,000 and no longer needed in the business.
a. Indigo's Gain/Loss for Distributing Property A
Compute Indigo's recognized gain or loss if it distributes Property A in redemption of Brianna's shares. The distribution of Property A would result in a realized gain of $143,000 to Indigo, of which $143,000 is recognized as ordinary income.
b. Indigo's Gain/Loss for Distributing Property B
Compute Indigo's recognized gain or loss if it distributes Property B in redemption of Brianna's shares. The distribution of Property B would result in a realized loss of $85,800 to Indigo, of which $85,800 is recognized as an ordinary loss.
c. Indigo's Gain/Loss for Selling Property B
Compute Indigo's recognized gain or loss if it sells Property B to an unrelated party, then distributes the sale proceeds in redemption of Brianna's shares. A sale of Property B to an unrelated party would result in a realized gain of $286,000 to Indigo, of which $214,200 is recognized as ordinary income.
What is recognized? Recognize is the act of acknowledging and appreciating something or someone. It is the process of acknowledging the importance or value of something or someone. Recognition can be as simple as a smile or verbal acknowledgment, or it can be a more formal process such as a written letter of appreciation, or awarding a medal or certificate.