Question

Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of whom hold 3,500 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 505 of her shares for $26,400 per share on December 31 of this year. Wilma’s income tax basis in each share is $8,150. Flintstone has current E&P of $10,650,000 and accumulated E&P of $50,880,000.

b. What is Wilma’s income tax basis in the remaining 2,995 shares she owns in the company?

Flintstone Company is owned equally by Fred Stone and his sister Wilma, each of whom hold 3,500 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 505 of her shares for $26,400 per share on December 31 of this year. Wilma’s income tax basis in each share is $8,150. Flintstone has current E&P of $10,650,000 and accumulated E&P of $50,880,000.

b. What is Wilma’s income tax basis in the remaining 2,995 shares she owns in the company?

Answer 1

Ans would be

24,409,250

Please find below table useful to compute desired results: -

А B i No. of shares hold 3500 2 Redeem shares 505 3 Price of share 26400 4 Income tax basis 8150 5 Current E&P 10650000 6 Accumulated E&P 50880000 7 Present Ownership =B1/B1+B1) 8 Reduced ownership =(B1-B2) B1+B1-B2) 9 Dividend Recognized =B3*B2 10 Income tax basis in remaining shares =B1*B4 11 Unused tax basis of 505 shares =B2*B4 12 Basis of remaining 2995 shares =(B1-B2)*B4 13 Reduction in its E&P I=B9

End results would be as follows: -

A 1 No. of shares hold 2 Redeem shares 3 Price of share 4 Income tax basis 5 Current E&P 6 Accumulated E&P 7 Present Ownership 8 Reduced ownership 9 Dividend Recognized 10 Income tax basis in remaining shares 11 Unused tax basis of 505 shares 12 Basis of remaining 2995 shares 13 Reduction in its E&P 3,500 505 26,400 8,150 10,650,000 50,880,000 50.00% 46.11% 13,332,000 28,525,000 4,115,750 24,409,250 13,332,000