Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of

Question

Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of whom hold 1,800 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 460 of her shares for $29,900 per share on December 31 of this year. Wilma’s income tax basis in each share is $8,300. Flintstone has current E&P of $10,620,000 and accumulated E&P of $50,040,000. a. What is 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

Explanation / Answer

Wilma reduces her ownership in the Flintstone company from 50% to 42.6%(1340/3140). Wilma fails the "substantially disproportionate" test to treat the redemption as an exchange.Although she reduces her ownership below 50%, her ownership percentage after the redemption is not less than 80% of her ownership before the redemption.As a result, Wilma recognises a dividend of 413754000(460 shares*$29900).

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