Comet Corporation Is Owned Equally by Patrick and His Sister

question 40

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 $160,000 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 $40,000 in E&P as a result of the exchange.
• D)A reduction of $80,000 in E&P as a result of the exchange.

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Definitions:

Nonrenewable Resource

A natural resource that cannot be replenished at the same rate at which it is consumed.

Future

A term referring to events that have not yet occurred or financial contracts regarding assets to be delivered or transacted at a later date.

User Cost

The opportunity cost of using a durable good or natural resource, factoring in depreciation and the forgone interest that could have been earned if the money was invested elsewhere.