At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock. The transaction qualified as a disproportionate redemption for the shareholder. Blackbird's E & P is reduced by $300,000 as a result of the distribution.

Question

Quizplus · Accepted Answer

In a disproportionate redemption, the distribution is treated as a sale or exchange, not as a dividend, so the E & P is not reduced by the distribution amount. Instead, the E & P would be adjusted based on the gain or loss recognized by the shareholder on the sale or exchange, not the distribution amount itself.

At a Time When Blackbird Corporation Had E & P