Question

Crane Corporation has 2,000 shares of stock outstanding. It redeems 500 shares for $370,000 when it has paid-in capital of $300,000 and E & P of $1,200,000. The redemption qualifies for sale or exchange treatment for the shareholder. Crane incurred $13,000 of accounting and legal fees in connection with the redemption transaction and $18,500 of interest expense on debt incurred to finance the redemption. What is the effect of the distribution on Crane Corporation's E & P? Also, what is the proper tax treatment of the redemption expenditures?

Answer 1

Answer and Explanation:

The corporation crane would have to bring down it's E & P because of the redemption. It would bring it down to about 300000which is a 25% reduction in 1200000 the E&P amount.

Because the stock redemption brought about sales and exchange treatment,. Cranes E&P account is reduced . The expense of 13000 will not be deducted from. Tax fees are not deductible against redemption.