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

Exercise 55

Bedrock Inc.is owned equally by Barney Rubble and his wife Betty, each of whom hold 1,000 shares in the company.Betty 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.Betty's income tax basis in each share is $5,000.Bedrock 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 Betty as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied?
b.Given your answer to question a, what is Betty'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 Bedrock reduce its E P as a result of the redemption?
d.Can Betty argue that the redemption is "not essentially equivalent to a dividend" and should be treated as an exchange?