Tax Implication of redemption of shares for Stock holders-

The implication of Tax upon stockholders depends upon post redemption scenario, i.e. we need to check that whether the equity interest of the stock holder is same or significantly lower after the redemption.

So, in case if the equity interest of the stock holder remain the same after redemption, in that case, the redemption shall be treated as a dividend payment (deemed dividend redemption).

But, in case if the equity interest of the stock holder declines significantly after the redemption, kn that case the stock redemption shall be treated as capital sale, in which the stock holder will either have a capital gain or capital loss

Tax Implication of redemption of shares for Corporation-

The tax implication for the corporation will be depend upon the mode of payment against the redeem stock.

So, in case if the company has made the payment through cash to redeem stock, than it would have no effect on the taxable income of the corporation.

But in case, the corporation distributes property against redemption of shares, than it must recognize a gain, but recording of loss in not permitted, as the property were sold for the fair market value for tax purpose.

Bellow is the Question and above is what the question is based on

Can you elaborate on whether a corporate shareholder would prefer to receive a dividend payment, or have the distribution treated as a sale, and why?