Comet Corporation Is Owned Equally by Patrick and His Sister

question 75

Multiple Choice

Comet Corporation is owned equally by Patrick and his sister Pam, each of whom hold 100 shares in the company.Comet redeems 50 of Pam's shares on December 31, year 1, 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, year 1.What are the tax consequences to Comet as a result of the stock redemption?

• A)No reduction in E&P as a result of the exchange.
• B)A reduction of $50,000 in E&P as a result of the exchange.
• C)A reduction of $62,500 in E&P as a result of the exchange.
• D)A reduction of $125,000 in E&P as a result of the exchange.

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Definitions:

Endorsed

Endorsed refers to the approval or support, often given formally or officially to signify agreement with or sanction of something.

Full Endorsement

A signature on the back of a negotiable instrument, such as a check, that specifies the person to whom the instrument is to be paid, transferring ownership.

Blank Endorsement

Blank Endorsement is a signature on a financial instrument, such as a check, without designating a payee, making it payable to the bearer.

Drawer

In accounting, the entity (person or organization) that issues or writes a bill of exchange, check, or draft, instructing another entity to pay.