Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100

Question

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 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 A. No reduction in E&P; because of the exchange. A reduction of $50,000 in E&P; because of the exchange A reduction of $62,500 in E&P; because of the exchange A reduction of $125,000 in E&P; because of the exchange

Explanation / Answer

Ans) Point A is the answer.i.e. No reduction in the E&P because of the exchange.

Note: The redemption of common stock only effects the common stcok account and bank account. It doesnot effect earnings.

Assuming E&P full form is Earnings and Profit.

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