Comet Company is owned equally by Pat and his sister Pam, each of whom holds 105 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 54 of her shares for $1,080 per share on December 31, 20X3. Pam's income tax basis in each share is $400. Comet has total E&P of $300,000. What are the tax consequences to Pam because of the stock redemption?

Question

Quizplus · Accepted Answer

To determine the tax consequences of the stock redemption to Pam, we need to calculate the amount of gain or loss she will realize on the redemption. The gain or loss on redemption is equal to the difference between the amount realized (i.e., $1,080 per share) and Pam's adjusted basis in the redeemed shares (i.e., $400 per share).

The amount realized on the redemption of 54 shares is:

54 shares x $1,080 per share = $58,320

Pam's adjusted basis in the redeemed shares is:

54 shares x $400 per share = $21,600

Therefore, Pam will realize a capital gain of :

Amount realized - Adjusted basis = $58,320 - $21,600 = $36,720

Pam will recognize a capital gain of $36,720 on the redemption of her shares, and her tax basis in each of her remaining shares will remain at $400. Therefore, the correct answer is (A).

Comet Company Is Owned Equally by Pat and His Sister