Reference no: EM132782133

Question 1 - Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of whom hold 1,600 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 425 of her shares for $29,800 per share on December 31 of this year. Wilma's income tax basis in each share is $7,350. Flintstone has current E&P of $10,630,000 and accumulated E&P of $50,490,000.

Required -

1. 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?

2. What is Wilma's income tax basis in the remaining 1,175 shares she owns in the company?

3. Assuming the company did not make any dividend distributions this year, by what amount does Flintstone reduce its E&P as a result of the redemption?

Question 2 - Bedrock Inc. is owned equally by Barney Rubble and his wife Betty, each of whom hold 500 shares in the company. Betty wants to reduce her ownership in the company, and it was decided that the company will redeem 250 of her shares for $32,600 per share on December 31 of this year. Betty's income tax basis in each share is $9,750. Bedrock has current E&P of $10,290,000 and accumulated E&P of $50,380,000.

Required -

1. 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?

2. What is Betty's income tax basis in the remaining 250 shares she owns in the company?

3. Assuming the company did not make any dividend distributions this year, by what amount does Bedrock reduce its E&P as a result of the redemption?

4. Can Betty argue that the redemption is "not essentially equivalent to a dividend" and should be treated as an exchange?