Question

Amy redeemed all 50 of her shares of Fontaine Corp. for $46,000. This represented one-half of Fontaine's outstanding stock. Just prior to the redemption, Fontaine has E&P of $80,000. What is Fontaine's E&P after the redemption?

a) $0
b) $40,000
c) $34,000
d) $46,000

Answer 1

Fontaine Corp.'s earnings and profits (E&P) after Amy's redemption of her shares for $46,000 would be $34,000, calculated by deducting the redemption amount from the initial E&P of $80,000. The correct option is c) $34,000.

Step-by-step explanation:

The question revolves around the concept of earnings and profits (E&P) from a corporate tax perspective. When Amy redeems her 50 shares of Fontaine Corp. for $46,000, and these shares represent one-half of the company's outstanding stock, there can be a reduction in the E&P of the corporation. Without specific details regarding the tax treatment of the redemption, a basic approach to computing Fontaine's post-redemption E&P would subtract the redemption amount from the current E&P.

Therefore, starting with $80,000 in E&P and subtracting the $46,000 redemption amount, Fontaine's E&P after the redemption would be $34,000. This assumes that the redemption is treated as a dividend, which is the typical case unless specific exceptions apply, resulting in a reduction of the E&P by the distribution amount.