5. LO.7 During the current year, Gnatcatcher, Inc. (E & P of $1,000,000), distributed $200,000 each to

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5. LO.7 During the current year, Gnatcatcher, Inc. (E & P of $1,000,000), distributed

$200,000 each to Brandi and Yuen in redemption of some of their Gnatcatcher stock. The two shareholders are not related; they acquired their shares five years ago. Brandi and Yuen are in the 32% income tax bracket, and each had a $45,000 basis in her redeemed stock.

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

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

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