Spartan Corporation redeemed 25 percent of its shares for $4,500 on July 1 of th

Question

Spartan Corporation redeemed 25 percent of its shares for $4,500 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 $4,500. Its current E&P is $12,300. Spartan made dividend distributions of $3,600 on June 1 and $6,600 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.

Explanation / Answer

Answer

calculation of the accumulated E&P at the beginning of the next year

current EP = 12300 - 3600 - 6600

= 2100

accumulated EP on july 1 = 4500 + 2100 * 182 / 365

= 5547

spartan reduces accumulated E&P = 4500 or 25 % * 5547 = 1387

accumulated EP at next year = 4500 + 12300 - 3600 - 6600 - 1387

= 5213

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