Canary Corporation has 1,000 shares of stock outstanding.It redeems in a qualifying stock redemption 350 shares for $400,000 at a time when it has paid-in capital of $100,000 and E & P of $1 million.What would be the charge to Canary's E & P as a result of the redemption?

Question

Quizplus · Accepted Answer

In a qualifying stock redemption, the portion that is treated as a dividend is limited to the corporation’s current or accumulated earnings and profits (E&P). In this case, the corporation has $1 million in E&P, so the first $400,000 of the redemption will be treated as a dividend distribution.

The tax treatment of the dividend is determined partly by the corporation’s earnings and profits and partly by the shareholder’s basis in the stock. However, for purposes of the question, only the charge to the corporation’s E&P is relevant.

Therefore, the charge to the corporation’s E&P as a result of the redemption will be $400,000, the amount that is treated as a dividend distribution. The paid-in capital is not relevant to the computation of the E&P charge.

Canary Corporation Has 1,000 Shares of Stock Outstanding