Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of whom holds 1,700 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of whom holds 1,700 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 395 of her shares for $25,700 per share on December 31 of this year. Wilma’s tax basis in each share is $5,450. Flintstone has current E&P of $10,230,000 and accumulated E&P at the beginning of the year is $50,490,000.

 

a. What are the amount and character (capital gain or dividend) recognized by Wilma as a result of the stock redemption, assuming only the “substantially disproportionate with respect to the shareholder” test is applied?

 

b. What is Wilma’s tax basis in the remaining 1,305 shares she owns in the company?

 

c. Assuming the company did not make any dividend distributions this year, by what amount does Flintstone reduce its E&P as a result of the redemption?

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