Question

Spartan Corporation uses a calendar year and redeemed 25 percent of its shares for $3,300 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 $3,300. Its current E&P is $13,000. Spartan made dividend distributions of $2,700 on June 1 and $5,700 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.) Beginning balance in accumulated E & P

Answer 1

SOLUTION

Current E&P = $13,000

Dividend distribution during the year = 2,700 + 5,700 = 8,400

Current E&P after dividend = 13,000 - 8,400 = 4,600

Accumulated E&P on July 1= Accumulated E&P at the beginning of the year + (Current E&P after dividend * 6/12)

= 3,300 + (4,600 * 6/12)

= 5,600

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 = $3,300

Or,

25 percent of accumulated E&P on the date of redemption = 25% * 5,600 = 1,400

Thus, Reduction in accumulated E&P due to the redemption will be $1,400

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

Accumulated E&P at the beginning of next year = $3,300 + 13,000 - 2,700 - 5,700 - 1,400

= 6,500