Comet Company is owned equally by Pat and his sister Pam, each of whom holds 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, 20X3. 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 because of the stock redemption?

Question

Quizplus · Accepted Answer

The amount of the redemption payment is $50,000 (50 shares x $1,000 per share). Since Pam's tax basis in her shares is only $500 each and she will receive $1,000 per share, she will recognize a capital gain of $500 per share ($1,000 redemption price - $500 tax basis). This results in a total capital gain of $25,000 ($500 gain per share x 50 shares redeemed). Pam's tax basis in each of her remaining shares will remain at $500 per share.

Comet Company Is Owned Equally by Pat and His Sister