Question

Fred Farmer and his two sons owned 100 percent of Fruits and Nuts, Inc. Fred owned 50 percent of the stock, but he had 25 percent redeemed by the corporation for a building with a basis of $10,000 and a value of $50,000. If E&P is $200,000 and Fred's basis in his stock before the redemption was $20,000, the stock and building basis after the redemption are: Stock basis: $10,000; building basis: $50,000 Stock basis: $20,000; building basis: $50,000 Stock basis: $10,000; building basis: $10,000 Stock basis: $20,000; building basis: $10,000 please provide explanation

Answer 1

Solution: Stock basis: $20,000; building basis: $50,000

Fred's basis in the stock would remain the same; while the building basis would be $50,000 (25% was redeemed by corporation with a basis of $10,000 with a value of $50,000 and he owned 50%; the balance will be redeemed at $50,000)