Comet Company Is Owned Equally by Pat and His Sister

question 33

Multiple Choice

Comet Company is owned equally by Pat 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, 20X3. 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 because 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.

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Definitions:

Operation Indicated

Typically refers to performing the specific mathematical operation (addition, subtraction, multiplication, division) suggested by a situation or expression.

Collect Like Terms

A process in algebra involving the simplification of an expression by combining terms that have the same variables raised to the same power.

Operation Indicated

The mathematical operation (such as addition, subtraction, multiplication, or division) suggested by the context of a problem or equation.

Percentage

A portion or share expressed as a fraction of 100.