Question

Check my work Required information [The following information applies to the questions displayed below.] Part 1 of 3 10 points 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. eBook Print 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? References

Answer 1

A) Wilma reduces her ownership in Flintstone company from 50% to 42.25%(1390/3290).Wilma fails the substantially disproportionate test to treat the redemption as an exchange. Although she reduces her share below 50%,her ownership percentage after redemption is not less than 80% of her ownership before the redemption (80%×50%=40%).As a result, Wilma recognises a dividend of $17595000($34500×510shares)

B) Wilma's income tax basis in the remaining shares of stock is $10925000.Wilma adds back the unused tax basis of the 510 shares redeemed ($2932500) to the basis of her remaining 1390 shares ($7992500)

C) Flintstone reduces its E&P by $17595000,the amount of dividend income reported by Wilma