Problem 6-45 (LO. 1, 2) Stork Corporation (E & P of $850,000) has 1,000 shares of common stock outstanding. The shares are owned by the following individuals: Lana Johnson, 400 shares; Lori Jones (Lana's mother), 200 shares; and Leo Jones (Lana's brother), 400 shares. Lana paid $200 per share for the Stork stock eight years ago. Lana is interested in reducing her stock ownership in Stork Corporation via a stock redemption for $1,000 per share, the fair market value of the stock. Stork Corporation would distribute cash for the entire redemption transaction. In late October, Lana inquired as to the number of shares she would have to redeem in order to obtain favorable long-term capital gain treatment and the overall tax consequences of such a redemption to both her and Stork Corporation. a. Complete the letter to Lana in which you explain your conclusions. Carry the percentage of shares redeemed to one decimal place in your computations. Round final percentage answers to the nearest whole number. SWFT, LLP 5191 Natorp Boulevard Mason, OH 45040 October 28, 2021 Lana Johnson 1000 Main Street St. Paul, MN 55166 Dear Lana: : This letter is in response to your questions concerning a possible redemption of shares of stock you own in Stork Corporation. Currently, you own 400 shares of Stork Corporation common stock, and the remaining outstanding shares are owned by Lori Jones (your mother), 200 shares, and Leo Jones (your brother), 400 shares. You paid $200 per share for your stock eight years ago. You are interested in reducing your stock ownership in Stork Corporation via a stock redemption that would pay you $1,000 per share, the fair market value of the stock. Stork Corporation (E & P of$850,000) would distribute cash for the entire redemption transaction. You have asked us to determine the minimum number of shares that you would have to redeem in order to obtain favorable long-term capital gain treatment and the overall tax consequences of such a redemption to both you and Stork Corporation. Our conclusion is based on the facts as outlined in your October 21 letter. Any change in facts may cause our conclusions to be inaccurate. 60 In the redemption transaction, you will be deemed to own the shares owned by your mother, Lori. As such, your current ownership interest is %. To obtain long-term capital gain treatment on a redemption, your post-redemption ownership must be less than 50% of the total remaining shares outstanding and less - than 80% of your pre- redemption ownership of %. The minimum number of shares that you must redeem to obtain the desired result is shares. After the redemption, your ownership interest satisfies both the 50% and 80% tests. The The redemption of the shares would result in a long-term capital gain V to you in the amount of s redemption would result in a reduction of Stork Corporation's E & P in the amount of a X. Should you need additional information or need to clarify our conclusion, do not hesitate to call on me. Sincerely, Marilyn C. Stephenson, CPA Partner