Comet Company Is Owned Equally by Pat and His Sister

question 73

Multiple Choice

Comet Company is owned equally by Pat and his sister Pam, each of whom hold 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, 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, 20X3. What are the tax consequences to Comet because of the stock redemption?

• A) No reduction in E&P because of the exchange.
• B) A reduction of $50,000 in E&P because of the exchange.
• C) A reduction of $40,000 in E&P because of the exchange.
• D) A reduction of $80,000 in E&P because of the exchange.

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Definitions:

Competitive Bidding

A procurement process where suppliers submit price bids to win a contract to provide goods or services.

Outsourcing

The business practice of hiring parties outside a company to perform services or create goods traditionally performed in-house.

Supply-Chain Strategy

The planning and execution of all logistics and operations management processes to efficiently align production, distribution, and inventory.

Low-Cost

Referring to products, services, or strategies that require minimal financial outlay while aiming to maintain acceptable or competitive quality and performance.