Christopher and Ashley, brother and sister, each own 50 percent (1,000 shares) of the stock of Walcott Corporation.This year, Walcott redeems 400 of Christopher's shares in a qualifying redemption in exchange for land valued at $300,000 (basis $175,000).The corporation's E&P prior to the redemption was $350,000.Walcott's tax rate is 21 percent.What is Walcott's E&P after the redemption?

Question

Quizplus · Accepted Answer

Walcott's E&P after the redemption is calculated by first adjusting for the gain on the land and then subtracting the distribution. The gain on the land is the difference between its value ($300,000) and its basis ($175,000), which is $125,000. This gain increases E&P. So, before the distribution, E&P is $350,000 (initial E&P) + $125,000 (gain) = $475,000. The distribution of $300,000 then reduces E&P, resulting in an E&P after the redemption of $475,000 - $300,000 = $175,000. However, this calculation overlooks the tax effect on the gain. The correct approach should include the tax effect on the gain, which is 21% of $125,000 = $26,250. Therefore, the net increase to E&P from the gain is $125,000 - $26,250 = $98,750. Adding this net increase to the initial E&P gives $350,000 + $98,750 = $448,750. Subtracting the distribution of $300,000 results in an E&P after the redemption of $448,750 - $300,000 = $148,750. It seems there was a mistake in my explanation regarding the final E&P calculation. The correct calculation should directly adjust the initial E&P by the distribution and consider any tax effects separately as part of the gain calculation, which I incorrectly adjusted for taxes. The correct E&P after the redemption should be based on the initial E&P, the gain on the land, and the distribution, without incorrectly adjusting for taxes on the gain since the tax effect is not directly subtracted from E&P in this context. Given the options and the mistake in the calculation, none of the provided choices accurately reflects the correct E&P after considering the proper tax treatment and the distribution. The correct answer should reflect the initial E&P, adjust for the gain on the land, and then subtract the distribution, but the provided options and the explanation do not align with this correct approach. My initial explanation led to an incorrect conclusion. The correct process involves adjusting the initial E&P for the gain on the land and then considering the distribution, without incorrectly subtracting the tax on the gain from E&P. The oversight in the tax treatment in the explanation led to confusion, and the correct E&P adjustment should be straightforward based on the gain and the distribution. Given the error in the explanation and calculation, the reevaluation of the correct answer is necessary, focusing on the proper adjustment to E&P based on the provided information and the correct treatment of the gain and the distribution.

Christopher and Ashley, Brother and Sister, Each Own 50 Percent