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 60 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?