McGraw-Hill's Taxation of Business Entities 3rd Edition by Connie Weaver, Brian Spilker, Edmund Outslay, John Robinson, Ronald Worsham, Benjamin Ayers, John Barrick

Exercise 13

Wildcat Company is owned equally by Evan Stone and his sister Sara, each of whom hold 1,000 shares in the company. Sara wants to reduce her ownership in the company, and it was decided that the company will redeem 500 of her shares for $25,000 per share on December 31, 2011. Sara's income tax basis in each share is $5,000. Wildcat has current E P of $10,000,000 and accumulated E P of $50,000,000.
a. What is the amount and character (capital gain or dividend) recognized by Sara as a result of the stock redemption
b. What is Sara's income tax basis in the remaining 500 shares she owns in the company
c. Assuming the company did not make any dividend distributions during
2011, by what amount does Wildcat reduce its E P as a result of the redemption