57. Boots Inc. is owned equally by Muhammad and his daughter Isabel, each of whom holds (1,000 shares in the company. Muhammad wants to retire from the company, and it was decided that the company will fedeem all 1,000 of Muhammad's shares for $25,000 per share on December 31 of this year. Muhammad's tax basis in each share is $500. Boots Inc. has current E&P of $1,000,000 and at the beginning of the year accumulated E&P is $5,000,000. a) What must Muhammad do to ensure that the redemption will be treated as an exchange? b) If Muhammad remained as the chair of the board after the redemption, what are the amount and character of income (capital gain or dividend) that Muhammad will recognize this year? c) If Muhammad treats the redemption as a dividend, what happens to the stock basis in the 1,000 shares redeemed? LO 18-4

57. Boots Inc, is owned equally by Muhammad and his daughter Isabel, each of whom holds 1,000 shares in the company. Muhammad wants to retire from the company, and it was decided that the company will fedeem all 1,000 of Muhammad's shares for $25,000 per share on December 31 of this year. Muhammad's tax basis in each share is $500. Boots Inc. has current E\&P of $1,000,000 and at the beginning of the year accumulated E\&P is $5,000,000. a) What must Muhammad do to ensure that the redemption will be treated as an exchange? b) If Muhammad remained as the chair of the board after the redemption, what are the amount and character of income (capital gain or dividend) that Muhammad will recognize this year? c) If Muhammad treats the redemption as a dividend, what happens to the stock basis in the 1,000 shares redeemed