Comet Corporation is owned equally by Patrick and his sister Pam, each of whom hold 100 shares in the company.Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31, year 1.Pam's income tax basis in each share is $500.Comet has total E&P of $250,000.What are the tax consequences to Pam as a result of the stock redemption?
A)$25,000 capital gain and a tax basis in each of her remaining shares of $500.
B)$25,000 capital gain and a tax basis in each of her remaining shares of $100.
C)$50,000 dividend and a tax basis in each of her remaining shares of $100.
D)$50,000 dividend and a tax basis in each of her remaining shares of $50.

Question

Quizplus · Accepted Answer

The stock redemption results in a capital gain for Pam because the redemption can be treated as a sale or exchange of her shares, rather than a dividend, under certain conditions. Since Pam sold her shares for $1,000 each, with a basis of $500 each, she realizes a capital gain of $25,000 (($1,000 - $500) * 50 shares). Her basis in the remaining shares does not change, so it remains $500 per share.

Comet Corporation Is Owned Equally by Patrick and His Sister