ABC Corporation has outstanding shares of common stock of which A, B, C and D each owns 100 shares. In one transaction, ABC Corporation redeems 55 shares from A, 25 shares from B, and 20 shares from C. The earnings and profits of ABC Corporation was $100,000 on the date of redemption. The redemption price was $100 per share. The shareholders purchased their stock more than one year ago for $80 per share.

Hint:

The taxability of stock redemption is generally determined by the effect of the redemption on the shareholder. The shareholders ownership % after the redemption would determine capital gain vs. dividend treatment. If there is no reduction in ownership %, the entire amount received will be treated as dividend.

1A. What is the tax effect to A of the redemption?

Group of answer choices

Dividend of $1,100

Long-term capital gain of $1,100

Dividend of $5,500

Long-term capital gain of $5,500

1B. What is the tax effect to B of the redemption?

Group of answer choices

No effect

Dividend of $2,500

Long-term capital gain of $500

Long-term capital gain of $500 & dividend of $2,000

1C. What is the tax effect to C of the redemption?

Group of answer choices

No effect

Dividend of $400

Dividend of $2,000

Dividend of $400 & Long-term capital gain of $1,600.