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Capital gain or dividend

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Wildcat Company is owned equally by Evan and his sister Sara, each of whom holds 1,000 shares in the company. Sara wants to reduce her ownership in the company, and it was decided that the company will redeem 500 of her shares for $25,000 per share on December 31 of this year. Sara's tax basis in each share is $5,000. Wildcat has a current E&P of $10,000,000 and at the beginning of the year accumulated E&P is $50,000,000.

a. What are the amount and character (capital gain or dividend) recognized by Sara because of the stock redemption?

b. What is the tax basis in the remaining 500 shares Sara owns in the company?

c. By what amount does Wildcat reduce its E&P because of the redemption?

Reference no: EM133455444

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