Crane Corporation has 2000 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? A) Crane corporation had 2000 shares of stock outstanding when it redeemed 5000 shares for $370,000. The shareholder received sale or exchanged treatment on the redemptions. Crane had paid in caption of $300,000 ad E & P of $1,200,000 at the time of the redemption. As a result of the redemption transaction, Crand Corporation incurred $13,000 of accounting and legal time of the redemption. As a result of the redemption transaction, Crane Corporation incurred $13,000 of accounting and legal fees. Crane also had $18,500 of interest expense on debt incurred to finance the redemption. Our conclusions are based on the facts as outlined in your November 25 letter. Any changes in facts may cause our conclusions to be inaccurate.
Crane Corporation would DECREASE its E & P in the amount of $300,000 as a result of the redemption. This represents a 25% change in the amount of the E & P corresponding to the 25% stock redemption. When a stock redemption results in sale or exchange treatment for the shareholder, the E & P of the distributing corporation attributable to the stock redeemed. The $_____ balance of the redemption distribution would Decrease the PAID IN CAPAITAL of the corporation. NO deduction is allowed for expenditures incurred by a corporation in connection with the redemption of its stock. As such none of the $13,000 of accounting and legal fees is deductible. However, the $18,500 of debt-financed interest expense IS deductible