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 will reduce its earnings and profits by $100,000 as a result of the redemption.

Question

Quizplus · Accepted Answer

Battle Corporation will reduce its earnings and profits (E&P) by the amount that is actually distributed to the shareholders, which is $100,000, but the reduction in E&P also depends on whether the distribution is considered a dividend distribution or a return of capital. The statement oversimplifies the treatment by not considering the nature of the distribution and the specific tax rules applicable to stock redemptions.

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