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 marginal tax rate is 34 percent. What is Walcott's E&P after the redemption?

Question

Quizplus · Accepted Answer

Walcott recognizes a $125,000 gain ($300,000 - $175,000) on distribution of the property net of $42,500 tax ($125,000 x 34%) which increases E&P to $432,500 ($350,000 + $125,000 - $42,500). E&P is then reduced by the lesser of the amount of the distribution ($300,000) or the $86,500 ($432,500 x 20%) attributable to the 20% (400 shares/2,000 shares outstanding) fraction of redeemed shares. Walcott's post-redemption E&P is $346,000 ($350,000 + $125,000 - $42,500 - $86,500).

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