Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of
ID: 2510874 • Letter: F
Question
Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of whom hold 1,900 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 510 of her shares for $34,500 per share on December 31 of this year. Wilma’s income tax basis in each share is $5,750. Flintstone has current E&P of $10,130,000 and accumulated E&P of $50,670,000.
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 share from 50% to 42.24% (1390/3290*100).
However, she fails the substantially disproportionate test the treat the redemption as an exchange.
Although she has reduced her ownership below 50%, her ownership percentage after the redemption is not less than 80% of her ownership before the redemption(80%*50%=40%).
Wilma will only recognize a dividend of ($34,500*510 shares)=$17,595,000.
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