Question

Spartan Corporation uses a calendar year and redeemed 25 percent of its shares for $4,800 on July 1 of this year, in a transaction that qualified as an exchange under §302(a). Spartan’s accumulated E&P at the beginning of the year was $4,800. Its current E&P is $13,200. Spartan made dividend distributions of $3,300 on June 1 and $6,300 on August 31. Determine the beginning balance in Spartan’s accumulated E&P at the beginning of the next year. See Rev. Rul. 74-338, 1974-2 C.B. 101 and Rev. Rul. 74-339, 1974-2 C.B. 103 for help in making this calculation. (Round your intermediate calculations to the nearest whole dollar amount.)

Answer 1

Current E&P = $13,200

Dividend distribution during the year = $3,300 + $6,300 = $9,600

Therefore,

Current E&P after dividend = $13,200 - $9,600 = $3,600

Now,

Accumulated E&P on July 1

= Accumulated E&P at the beginning of the year + (Currect E&P after dividend x 6/12)

= $4,800 + ($3,600 x 6/12)

= $6,600

Reduction in accumulated E&P due to the redemption of shares on July 1 will be the lesser of the following two:

Amount paid to redeem the shares = $4,800

Or

25 percent of accumulated E&P on the date of redemption = $6,600 x 25% = $1,650

Thus,

Reduction in accumulated E&P due to the redemption will be $1,650.

Now calculate the accumulated E&P at the beginning of the next year as follows:

Accumulated E&P at the beginning of next year = $4,800 + $13,200 - $3,300 - $6,300 - $1,650 = $6,750

Hence, the correct answer is $6,750.