Question

Brent, Matt, Chris, Brad, and Anwer are five unrelated shareholders who each own 20 of the 100 outstanding shares of Aggie Corporation. On June 30 of this year, Aggie distributed $100,000 in cash to the shareholders. On September 30 of this year, Aggie redeemed all of Anwer’s shares for $80,000. Aggie had $45,000 of accumulated E&P at the beginning of the year and reported $120,000 of current E&P at year-end. What is Aggie’s accumulated E&P at the beginning of next year? Consult Rev. Rul. 74-338, 1974-2 C.B. 101. (Hint: Determine the tax status of the redemption and then calculate the effect of the June distribution on current E&P.) (Negative amount should be indicated with a minus sign.)

I need help determining the prorated undistributed current EP at 9/30.

Answer 1

Current E&P = $120,000

Dividend Distribution during the year = $100,000

Current E&P after dividend = $120,000-$100,000

= $20,000

Accumulated E&P on Sep 30 = Accumulated E&P at the beginning of the year +(Current E&P after dividend*9/12)

(As per calender year) = $45000+($20,000*9/12)

= $45,000+$15,000

= $60,000

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

Amount paid to redeem the shares = $80,000

OR

Anwer has 20% of share holding

20% of Accumulated E&P on the date of redemption = 20%*$60,000

= $12,000

Therefore reduction in accumulated E&P due to redemption in $12,000

Therefore Accumulated E&P at the begining of the next year as follows

$45,000+$120,000-$100,000-$12,000 = $53,000