T owns all of the stock of both B and S Corporations.T, desiring to bail E&P out of B Corporation, sold stock of B with a basis of $16,000 to S for $50,000.Unfortunately, the sale did not qualify for sale treatment due to the special provisions of § 304 concerning redemptions by related corporations.Assuming B has E&P of $40,000 and S has a deficit in E&P of ($25,000), T will report a dividend of
A)$50,000
B)$34,000
C)$40,000
D)$15,000
E)None of the above

Question

Quizplus · Accepted Answer

Under § 304, when one controlled corporation acquires the stock of another controlled corporation from a common shareholder, the transaction is treated as a redemption, not a sale. The amount treated as a dividend is limited to the E&P of the acquiring and acquired corporations. Here, B has E&P of $40,000, and S has a deficit of ($25,000), but the deficit does not reduce the E&P available for distribution. Therefore, T will report a dividend of $40,000, which is the E&P of B Corporation.

T Owns All of the Stock of Both B and S