Peter owns all 100 shares of Parker Corporation's stock. His basis in the stock is $30,000. Parker Corporation has $300,000 of E&P. Parker Corporation redeems 25 of Peter's shares for $90,000. What are the consequences to Peter and to Parker Corporation?
What will be an ideal response?
Since Peter still owns 100% of Parker Corporation's stock, the redemption is treated as a dividend. Peter has a $90,000 dividend taxed at a maximum of 15%. His basis in his remaining 75 shares remains at $30,000. Parker Corporation's E&P is reduced by $90,000.
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