Comet Corporation Is Owned Equally by Patrick and His Sister

question 107

Multiple Choice

Comet Corporation is owned equally by Patrick 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, year 1.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 as a result of the stock redemption?

• A)$25,000 capital gain and a tax basis in each of her remaining shares of $500.
• B)$25,000 capital gain and a tax basis in each of her remaining shares of $100.
• C)$50,000 dividend and a tax basis in each of her remaining shares of $100.
• D)$50,000 dividend and a tax basis in each of her remaining shares of $50.

---

Definitions:

Return on Investment

A performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.

Treasury Stock

Refers to shares that were issued and later reacquired by the company. It is subtracted from total equity.

Voting Rights

The rights of shareholders to vote on company matters, typically exercised during a corporation's annual general meeting.

Dividends

Payments made by a corporation to its shareholder members, distributing a portion of the company's earnings.