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 1,000 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 250 of her shares for $25,000 per share on December 31 of this year. Wilma’s income tax basis in each share is $5,000. Flintstone has current E&P of $10,000,000 and accumulated E&P of $50,000,000.

b. What is Wilma’s income tax basis in the remaining 750 shares she owns in the company?

    

Explanation / Answer

Wilma's income tax basis in the remaining shares of stock is $5000,000.

Wilma add back the " unused " tax basis of the 250 shares redeemed (250 * $5000/ share ) i.e. $12,50000 to the basis of her remaining 75O shares (750 * $5000/share) i.e. $3750000

So. Total of ($1250000 + $3750000 ) = $5000000

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