Crystal, Incorporated Is Owned Equally by John and His Wife

Essay

Crystal, Incorporated is owned equally by John and his wife, Arlene, each of whom owns 500 shares in the company. Arlene wants to reduce her ownership in the company, and it was decided that the company will redeem 200 of her shares for $5,000 per share on December 31, 20X3. Arlene's income tax basis in each share is $1,000. Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000. What is the amount and character (capital gain or dividend)recognized by Arlene as a result of the stock redemption, assuming only the "substantially disproportionate with respect to the shareholder" test is applied?