John owns 70% of the May Corporation stock and 60% of the June Corporation stock. John sells one- half of his interest in May Corporation to June Corporation for $45,000. The E&P accounts of May and June are $25,000 and $35,000, respectively. The result would be that

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Since John owns 70% of the May Corporation stock and 60% of the June Corporation stock, selling one-half of his interest in May Corporation to June Corporation means he now owns 35% of May Corporation and 90% of June Corporation. This transaction is not treated as a sale of stock by John, but rather as a dividend paid to John by June and then May. Since May Corporation has E&P of $25,000, only $12,500 is considered a dividend to John, and the rest is a return of capital. Similarly, since June Corporation has E&P of $35,000, only $22,500 is considered a dividend to John. Therefore, the sale is recast as a dividend paid to John, first by June and then by May.

John Owns 70% of the May Corporation Stock and 60