What kind of gain does Eleanor recognize when shares of Blue Corporation are redeemed for $260,000 after a § 351 transaction?

Eleanor recognizes a capital gain when the shares of Blue Corporation are redeemed for $260,000 after a § 351 transaction because the redemption of stock typically results in a sale or exchange of the stock, leading to the realization of a gain or loss. In this case, the gain is calculated based on the difference between the amount received and the adjusted basis of the shares she held prior to the redemption.

In a § 351 transaction, shareholders contribute property to a corporation in exchange for stock, often deferring any gains until the stock is later sold or exchanged. If Eleanor's adjusted basis in her shares was $120,000, for example, the gain recognized upon redemption would be the redemption amount of $260,000 minus her basis, resulting in a gain of $140,000. This gain is treated as a capital gain since it arises from the disposition of a capital asset (the shares).

The specific nature of the gain as capital rather than ordinary income or dividend is essential, aligning with tax principles governing stock transactions and redemptions. This treatment helps to avoid ordinary income tax rates, allowing Eleanor to benefit from lower capital gains rates depending on her holding period and the applicable tax laws.