Battle Corporation redeems 20 percent of its stock for $100,000 in a stock redemption that is treated as an exchange by the shareholders. Battle's E&P at the date of the redemption is $200,000. Battle must reduce its earnings and profits by $100,000 because of the redemption.
Battle reduces its E&P by the lesser of $100,000 or 20% of E&P at the date of the redemption ($40,000).

Question

Quizplus · Accepted Answer

In a stock redemption treated as an exchange, the corporation reduces its E&P by the percentage of stock redeemed, which is 20% of $200,000, equaling $40,000, not the $100,000 paid.

Battle Corporation Redeems 20 Percent of Its Stock for $100,000