Cotte Inc. has three shareholders, Phil, Bill, and Hill. Each shareholder owns 100 shares of common
stock. On July 1 of this year, Cotte Inc. redeemed 30 shares from each shareholder. In return, each shareholder
received $10,000. Phil acquired his shares three years ago and his adjusted basis in his 100 shares
was $3,000 at the time of the redemption. Cotte has $100,000 of accumulated E&P as of the end of the prior year, and anticipates earning a further $20,000 in E&P in the current year.
Please address the following:
- What are the federal tax consequences to Cotte, Inc. and Phil arising from this distribution?
- Would your answer to 1. change if the reason Cotte Inc. redeemed the shares was because it sold one of its businesses it actively had been conducting since 1990?
Would your answer to 1. change if the only transaction was a redemption of
of Phil’s shares, while Bill and Hill continued to hold their original 100 shares?
- Would your answer to 3. change if Bill, Phil, and Hill were siblings?