Part III - Stock Redemption (25 points)
The Shield Corporation has two shareholders, Peg and Nick. The basis of Peg's 600 shares, which she acquired in 2011, is $70,000. The basis of Nick's 400 shares, which he acquired in 2013, is $75,000. Peg and Nick are unrelated.
The Shield Corporation has owned and operated two businesses since 2010. Its accumulated earnings and profits as of January 1, 2024, were $227,000. In 2024, the two businesses earned taxable income of $80,000 and current earnings and profits (before federal income tax) of $85,500. On December 31, 2024, the corporation sold one of its businesses for $250,000, resulting in a $50,000 gain that is not included in the taxable income or earnings and profits amounts shown above. It retained the other business, the net assets of which had a fair market value of $150,000. The corporation used the $250,000 proceeds from the sale to redeem some stock of Peg and Nick. It paid $150,000 to Peg for 375 of her shares and $100,000 to Nick for 250 of his shares.
a. Compute the Shield Corporation's taxable income for the year ended December 31, 2024.
b. Compute the corporate income tax of Shield Corporation for the year ended December 31, 2024.
c. Compute the Shield Corporation's current earnings and profits for the year ended December 31, 2024.
d. Determine the amount of the income recognized by Peg as a result of the redemption.
e. How is the income computed in part d characterized (earned income, dividend income, long-term capital gain, short-term capital gain, or section 1231 gain)?
f. Determine the amount of the income recognized by Nick as a result of the December 31, 2024 redemption.
g. How is the income computed in part f characterized (earned income, dividend income, long-term capital gain, short-term capital gain, or section 1231 gain)?
h. Determine Shield Corporation's accumulated earnings and profits as of January 1, 2025.
