Two unrelated individuals, dave and tom, own all the stock of arnold corporation, which has earnings and profits of $400,000. because of his inactivity in the business for the last several years, dave has decided to retire from the business completely and move to oregon. accordingly, arnold corporation will redeem all the stock owned by dave and, in return, dave will receive a distribution of $500,000. dave's adjusted basis in the stock is $250,000. what will be the tax effect to dave?

$250,000 Capital gain

Explanation:

Distribution = $500,000

Dave's Adjusted basis = $250,000

The distribution of $500,000 will be assumed to be for stock payment since, Dave who is a shareholder is retiring and Arnold has to redeem the stock owned by Dave. The gain is computed as the difference between the distribution and the share holder's basis in the stock, Here, Dave's basis. The excess or gain is treated as a capital gain.

(Distribution - Adjusted basis)

= $500,000 - $250,000

= $250,000 Capital gain