LO.1 Julio is in the 35% tax bracket. He acquired 2,000 shares of stock in Gray Corporation seven years ago at a cost of $200 per share. In the current year, Julio received a payment of $450,000 from Gray Corporation in exchange for 1,000 of his shares in Gray.

Gray has E & P of $1 million. What tax liability would Julio incur on the $450,000 payment in each of the following situations? Assume that Julio has no capital losses.

a. The payment qualifies for stock redemption (i.e., sale or exchange) treatment.

b. The payment does not qualify for stock redemption (i.e., sale or exchange treatment is not applicable) treatment.