Comet Company is owned equally by Pat and his sister Pam, each of whom hold 175

Question

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 175 shares in the company Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 88 of her shares for $1,760 per share on December 31. 20X3. Pam's income tax basis in each share is $750. Comet has total E&P; of $335,000. What are the tax consequences to Pam because of the stock redemption? Multiple Choice 588,880 capital gain and a tax basis in each of her remaining shares of $750 388,880 capital gain and a tax basis in each of her remaining shares of $175 $154.880 dividend and a tax basis in each of her remaining shares of S175 $154,880 dividend and a tax basis in each of her remaining shares of $88

Explanation / Answer

Solution: $88,880 capital gain and a tax basis in each of her remaining shares at $750

Woring: The redemption will be treated as an exchange as Pam qualifies the substantially disproportionate test (her 33% ownership after the redemption is less than 50% and less than 40%). Her remaining shares retain a basis of $750 per share; and capital gain 88 * (1760-750) = 88,880

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