10,580,000, and accumulated E&P was $50, 780, 000 at the beginning of the year. a. What is the amount and character (capital gain or dividend) recognized by Betty as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied? b. Given your answer to part (a), what is Betty's income tax basis in the remaining 420 shares she owns in the company? c. By what amount does Bedrock reduce its E&P because of the redemption? d. Can Betty argue that the redemption is "not essentially equivalent to a dividend" and should be treated as an exchange?
10,580,000, and accumulated E&P was $50, 780, 000 at the beginning of the year. a. What is the amount and character (capital gain or dividend) recognized by Betty as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied? b. Given your answer to part (a), what is Betty's income tax basis in the remaining 420 shares she owns in the company? c. By what amount does Bedrock reduce its E&P because of the redemption? d. Can Betty argue that the redemption is "not essentially equivalent to a dividend" and should be treated as an exchange?
Chapter5: Introduction To Business Expenses
Section: Chapter Questions
Problem 48P
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Transcribed Image Text:Bedrock Incorporated is owned equally by Barney and his wife Betty, each of whom holds 840
shares in the company. Betty wants to reduce her ownership in the company, and it was
decided that the company will redeem 420 of her shares for $25, 400 per share on December
31 of this year. Betty's tax basis in each share is $7, 200. Bedrock has current E&P of $
10, 580,000, and accumulated E&P was $50, 780,000 at the beginning of the year. a. What is
the amount and character (capital gain or dividend) recognized by Betty as a result of the
stock redemption, assuming only the "substantially disproportionate with respect to the
shareholder" test is applied? b. Given your answer to part (a), what is Betty's income tax
basis in the remaining 420 shares she owns in the company? c. By what amount does
Bedrock reduce its E&P because of the redemption? d. Can Betty argue that the redemption is
"not essentially equivalent to a dividend" and should be treated as an exchange?
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