Question

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 as a result of the stock redemption?

a) $25,000 capital gain and a tax basis in each of her remaining shares of $100.
b) $50,000 dividend and a tax basis in each of her remaining shares of $50.
c) $50,000 dividend and a tax basis in each of her remaining shares of $100.
d) $25,000 capital gain and a tax basis in each of her remaining shares of $500.

Answer 1

d) $25,000 capital gain and a tax basis in each of her remaining shares of $500.

Step-by-step explanation:

Calculation to determine the tax consequences to Pam as a result of the stock redemption

Using this formula

Capital gain = Total amount - Tax basis

Let plug in the morning

Capital gain = (50 * $1,000) - ($500 * 50)

Capital gain = $50,000 - $25,000

Capital gain = $25,000

Since the Capital gain is $25,000 which means that The tax basis will be income tax basis in each share of $500 for the remaining 50 shares.

Therefore the the tax consequences to Pam as a result of the stock redemption will be:$25,000 capital gain and a tax basis in each of her remaining shares of $500.