(4) Two unrelated individuals, Aaron & Burr, own the stock of ABC Corporation. ABC redeems all of Aaron's stock in a transaction that fits within the provisions of §302(a). ABC had earnings and profits equal to $80,000. The corporation's assets have a fair market value equal to $400,000 and liabilities equal to $280,000. (a) What is the proper amount, if any, of the reduction of ABC's earnings and profits if Aaron received a $60,000 check in exchange for her ABC stock? (b) What is the proper amount, if any, of the reduction of ABC's earnings and profits if the corporation's assets were worth $340,000, and Aaron received $30,000 in exchange for his X Corporation stock?
(4) Two unrelated individuals, Aaron & Burr, own the stock of ABC Corporation. ABC redeems all of Aaron's stock in a transaction that fits within the provisions of §302(a). ABC had earnings and profits equal to $80,000. The corporation's assets have a fair market value equal to $400,000 and liabilities equal to $280,000. (a) What is the proper amount, if any, of the reduction of ABC's earnings and profits if Aaron received a $60,000 check in exchange for her ABC stock? (b) What is the proper amount, if any, of the reduction of ABC's earnings and profits if the corporation's assets were worth $340,000, and Aaron received $30,000 in exchange for his X Corporation stock?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:(4) Two unrelated individuals, Aaron & Burr, own the stock of ABC Corporation. ABC
redeems all of Aaron's stock in a transaction that fits within the provisions of §302(a). ABC
had earnings and profits equal to $80,000. The corporation's assets have a fair market value
equal to $400,000 and liabilities equal to $280,000.
(a) What is the proper amount, if any, of the reduction of ABC's earnings and profits if
Aaron received a $60,000 check in exchange for her ABC stock?
(b) What is the proper amount, if any, of the reduction of ABC's earnings and profits if the
corporation's assets were worth $340,000, and Aaron received $30,000 in exchange for
his X Corporation stoc
Expert Solution
Step 1
To the degree of the corporation's earnings and profits, a corporation's redemption of shares is regarded as a taxable dividend under Internal Revenue Code (IRC) section 302(a) (E&P). The value of the asset acquired in exchange for the stock determines the size of the taxable dividend. The tax-deductible payout is equivalent to the drop in profits and earnings. It's crucial to keep in mind that the E&P is only reduced if the stock redemption qualifies as a taxable dividend under IRC section 302(a). There would be no decrease in E&P if the redemption were to be regarded as a non-taxable return of capital.
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