Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?

Question

Quizplus · Accepted Answer

A reduction in E&P is required because the redemption of shares is treated as a distribution of property, and for tax purposes, distributions reduce E&P. The amount of the reduction is equal to the payment to Pam, which is 50 shares at $1,000 each, totaling $50,000.

Comet Company Is Owned Equally by Pat and His Sister