Problem 07-53 (LO 07-4) (Algo)

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Flintstone Company is owned equally by Fred and his sister Wilma, each of whom holds 2,100 shares in the company. Wilma wants to reduce her ownership in the company, and it was decided that the company will redeem 565 of her shares for $26,800 per share on December 31 of this year. Wilma's tax basis in each share is $7,250. Flintstone has a current E&P of $10,800,000 and the accumulated E&P at the beginning of the year is $50,520,000.

a. What are the amount and character (capital gain or dividend) recognized by Wilma because of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied?

b. Given your answer to part (a), what is the tax basis in the remaining 1,535 shares Wilma owns in the company?

c. By what amount does Flintstone reduce its E&P because of the redemption?