During the current year, Gnatcatcher, Inc., (E & P of $1 million) distributed $200,000 each to Brandi and Yuen in redemption of some of their Gnatcatcher stock. The two shareholders acquired their shares five years ago. Each shareholder is in the 33% tax bracket, and each had a $45,000 basis in her reedemed stock.

a. Assume the distribution to Brandi is a qualifying stock redemption. Determine Brandi's tax liability on the distribution.

b. Assume the distribution to Yuen is a nonqualified stock redemption. Determine Yuen's tax liability on the distribution.

a. Brandi's tax liability on the distribution is $23,250

b. Yuen's tax liability on the distribution is $30,000

Explanation:

Given

Amount = $200,000

Tax bracket = 33%

Redeem Stock = $45,000 basis

a.

First, we calculate the taxable dividend.

Taxable dividend is calculated by subtracting the redeemed stock from the total amount.

Taxable dividend = Amount - Redeemed Stock

Taxable dividend = $200,000 - $45,000

Taxable dividend = $155,000

Brandi's tax liability on the distribution is calculated as: Taxable dividend * tax rate

Tax liability = $155,000 * 15%

Tax liability = $23,250

Hence, Brandi's tax liability on the distribution is $23,250

b. With an assumption that the distribution to Yuen is a nonqualified stock redemption.

Yuen's tax liability on the distribution is calculated as follows;

Tax liability = Amount * Tax rate

Tax liability = $200,000 * 15%

Tax liability = $30,000

Hence, Yuen's tax liability on the distribution is $30,000

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