Comet Company is owned equally by Pat and his sister Pam eac

Comet Company is owned equally by Pat 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, 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? $25,000 capital gain and a tax basis in each of her remaining shares of $500 $25,000 capital gain and a tax basis in each of her remaining shares of $100 $50,000 dividend and a tax basis in each of her remaining shares of $100 $50,000 dividend and a tax basis in each of her remaining shares of $50

Solution

Option A is correct.

$25000 capital gain and a tax basis in each of her remaining shares of $500

The redemption has to be treated as an exchange as the substantialy disproportionate test is met by sam(the ownership held by her of 33% reduces after redemption to less than 50% and 40%). Remaining shares,she holds have a basis of $500 per share.