CHAPTER 4—CORPORATE DISTRIBUTIONS: STOCK
REDEMPTIONS AND PARTIAL LIQUIDATIONS Key
1. M Corporation has 100 shares of outstanding stock, all of which are owned by B. Assuming M Corporation
redeems 70 of B’s shares, the redemption does not qualify for exchange treatment.
2. K owns 40 of the 100 shares outstanding of L Corporation. The remaining shares are owned by unrelated
individuals. Assuming L redeems 10 shares of K’s stock, the redemption will be treated as a dividend under the
safe harbor tests.
3. Corporate taxpayers favor sale treatment in stock redemptions as opposed to dividend treatment.
4. Under the constructive ownership rules of § 318 an individual is considered to own the stock owned by his or
her spouse and other family members, including parents, brothers, sisters, children, and grandchildren.
5. Mr. Y owns 40 percent of R Corporation and 20 percent of the Y&T Partnership. Y&T owns 30 percent of R.
Under the constructive ownership rules of § 318, Mr. Y is treated as owning 46 percent of
6. Mr. Y owns 40 percent of R Corporation and 20 percent of the Y&T Partnership. Y&T owns 30 percent of R.
Under the constructive ownership rules of § 318, Y&T is treated as owning 30 percent of R.
7. Mr. S owns 40 percent of R Corporation and 60 percent of T Corporation. T owns 30 percent of
8. Mr. S owns 40 percent of R Corporation and 60 percent of T Corporation. T owns 30 percent of
9. M owns 60 percent of B Corporation and 40 percent of C Corporation. C Corporation owns 20 percent of B
Corporation. Under the constructive ownership rules of § 318, M is treated as owning 60 percent of B.
10. M owns 60 percent of B Corporation and 40 percent of C Corporation. C Corporation owns 20 percent of B
Corporation. Under the constructive ownership rules of § 318, C Corporation is treated as owning 80 percent of
B.
11. Mr. Smooth owns directly 70 percent of the stock of Mellow Corporation and 60 percent of the stock of
Calm Corporation. Mellow owns 30 percent of Calm. During the year, Calm redeemed all 60 percent of Mr.
Smooth’s stock. Mr. Smooth may waive the constructive ownership rules and secure sale treatment for the
redemption.
12. During the year, Mr. T redeemed 20 shares of the stock of D Corporation for $15,000. The basis of the
shares redeemed was $8,000. Assuming the redemption does not qualify for sale treatment, Mr. T will have a
dividend of $7,000.
13. In determining whether a redemption distribution qualifies for sale treatment under the facts and
circumstances tests of § 302, one factor typically considered is whether the redemption was motivated by a
valid business purpose.
14. Ed has decided to retire and completely terminate his interest in his closely held business. Currently, he
owns 60 percent of the corporation while his son owns the remaining 40 percent. His son received his 40
percent over 20 years ago as a gift from his father. Ed will not be able to secure exchange treatment for a
redemption of his stock because he will be treated as owning all of the stock of his son.
15. Baxter died this year with a gross estate of $2,000,000, consisting primarily of stock in his family-owned
corporation. A redemption of the estate’s stock will not qualify if Baxter’s interest in th corporation which is
included in his estate is 8 percent.
16. Hedi and her daughter own all of the stock of C Corporation equally. This year Hedi died, leaving all of her
stock to her daughter. Her gross estate was $700,000, consisting primarily of C stock. Funeral and
administrative expenses were $20,000. Other claims against the estate were $60,000. A redemption of the
estate’s stock will qualify for exchange treatment, at least in part, if Hedi’s interest in the corporation which is
included in her estate is valued at not less than $238,001.
Clothing Inc. and Mr. Red Button formed Apparel Corp. in 1960. It is engaged in the manufacture and sale of
shirts and ties. Apparel acquired the tie business from Silk Inc. Now it desires to get out of the tie business but
continue in the shirt business. The primary assets of the tie business are:
Adjusted
Fair Market
Assets
Basis
Value
Plant
$60,000
$200,000
Equipment
20,000
45,000
Truck
15,000
8,000
Assume all necessary requirements are satisfied unless otherwise stated or implied.
17. Clothing Inc. and Mr. Red Button formed Apparel Corp. in 1960. It is engaged in the manufacture and sale
of shirts and ties. Apparel acquired the tie business from Silk Inc. Now it desires to get out of the tie business
but continue in the shirt business. The primary assets of the tie business are:
Adjusted
Fair Market
Assets
Basis
Value
Plant
$60,000
$200,000
Equipment
20,000
45,000
Truck
15,000
8,000
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Both of the shareholders of Apparel are assured of sale treatment assuming they exchange a portion of their stock in exchange for the proceeds from
the sale of the tie business.
18. Clothing Inc. and Mr. Red Button formed Apparel Corp. in 1960. It is engaged in the manufacture and sale
of shirts and ties. Apparel acquired the tie business from Silk Inc. Now it desires to get out of the tie business
but continue in the shirt business. The primary assets of the tie business are:
Adjusted
Fair Market
Assets
Basis
Value
Plant
$60,000
$200,000
Equipment
20,000
45,000
Truck
15,000
8,000
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Apparel generally will recognize gain but not loss on the sale of the tie assets assuming the proceeds are promptly distributed.
19. Clothing Inc. and Mr. Red Button formed Apparel Corp. in 1960. It is engaged in the manufacture and sale
of shirts and ties. Apparel acquired the tie business from Silk Inc. Now it desires to get out of the tie business
but continue in the shirt business. The primary assets of the tie business are:
Adjusted
Fair Market
Assets
Basis
Value
Plant
$60,000
$200,000
Equipment
20,000
45,000
Truck
15,000
8,000
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Sale treatment is assured for some shareholders if the tie business has been operated by Apparel for three years and Silk for three years.
20. Clothing Inc. and Mr. Red Button formed Apparel Corp. in 1960. It is engaged in the manufacture and sale
of shirts and ties. Apparel acquired the tie business from Silk Inc. Now it desires to get out of the tie business
but continue in the shirt business. The primary assets of the tie business are:
Adjusted
Fair Market
Assets
Basis
Value
Plant
$60,000
$200,000
Equipment
20,000
45,000
Truck
15,000
8,000
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Sale treatment is assured for some shareholders if the tie business was acquired in a nontaxable merger three years ago.
21. Clothing Inc. and Mr. Red Button formed Apparel Corp. in 1960. It is engaged in the manufacture and sale
of shirts and ties. Apparel acquired the tie business from Silk Inc. Now it desires to get out of the tie business
but continue in the shirt business. The primary assets of the tie business are:
Adjusted
Fair Market
Assets
Basis
Value
Plant
$60,000
$200,000
Equipment
20,000
45,000
Truck
15,000
8,000
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Assuming that Apparel distributed the assets of the tie business in redemption of all of the stock of Red Button, Apparel would recognize a gain of
$165,000 and a loss of $7,000.
22. Clothing Inc. and Mr. Red Button formed Apparel Corp. in 1960. It is engaged in the manufacture and sale
of shirts and ties. Apparel acquired the tie business from Silk Inc. Now it desires to get out of the tie business
but continue in the shirt business. The primary assets of the tie business are:
Adjusted
Fair Market
Assets
Basis
Value
Plant
$60,000
$200,000
Equipment
20,000
45,000
Truck
15,000
8,000
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Assume Apparel purchased the tie business from Silk four years ago for $250,000 cash. A pro rata distribution attributable to a sale of the tie
business should qualify for sale treatment under the meaningful reduction test.
23. Clothing Inc. and Mr. Red Button formed Apparel Corp. in 1960. It is engaged in the manufacture and sale
of shirts and ties. Apparel acquired the tie business from Silk Inc. Now it desires to get out of the tie business
but continue in the shirt business. The primary assets of the tie business are:
Assets
Adjusted
Basis
Fair Market
Value
Plant
$60,000
$200,000
Equipment
20,000
45,000
Truck
15,000
8,000
Assume all necessary requirements are satisfied unless otherwise stated or implied.
This year Red Button and Clothing had a disagreement on the direction of the company. Consequently, Red has decided that he would like to take the
tie business and go his separate way. The most logical form that this transaction should take is a partial liquidation.
24. Twelve years ago, F persuaded his daughter to join in the family business by giving her 40 percent of the
stock. He has retained the remaining 60 percent until now to ensure control. F now wishes to turn the business
over to his daughter. A redemption of all of F’s shares can qualify for capital gain or loss treatment.
25. In order for a redemption or partial liquidation to qualify for exchange treatment, the distribution must not
be essentially equivalent to a dividend. The approach used by the governing provisions in determining dividend
equivalency is the same whether the transaction is a redemption or partial liquidation.
26. A distribution in partial liquidation is not considered equivalent to a dividend if it is attributable to a genuine
contraction of the corporation’s business.
27. T Corporation manufactures handbags and belts. The belt business was acquired from S, who established
the business in her home three years ago. S contributed the business to T in a nontaxable transaction under §
351. The handbag business has been operated by T since 1970. Assuming T sells the belt business and
distributes the proceeds, the distribution qualifies for partial liquidation treatment.
28. T, the sole shareholder of R Corporation, wants to retire. To this end, he sold all of his stock in R to X
Corporation, which is a wholly owned corporation of his son. T is assured of exchange treatment on the sale.
29. S owns 60 percent of the 100 shares of LMN, Inc. stock outstanding. His dad owns 20 shares, and his friend
J owns the remaining 20 shares. S also owns 50 percent of OPQ’s 100 shares outstanding while J owns the other
50 percent. Assuming S sells 40 shares of LMN to OPQ for a gain of $5,000, he is assured of exchange
treatment.
30. T owns all shares of outstanding common stock of W Corporation. V Corporation and W agree to a merger
whereby V will absorb W. T receives common and preferred stock in V, and her stock in W is canceled. T’s
receipt of the preferred stock has the same effect as a nontaxable stock dividend.
31. B owns 30 shares of MNO Corporation preferred stock that he received as a nontaxable stock dividend two
years ago when the corporation had a deficit of $7,000 in E&P. Currently, MNO has substantial E&P.
Assuming B sold the preferred stock to an unrelated third party, he is assured of sale treatment.
32. T redeems her § 306 stock. The amount realized is treated as a dividend to the extent that T would have a
dividend if at the time of the distribution cash had been distributed in lieu of stock.
33. F Corporation has 100 shares of outstanding stock, all owned by J. J bought the shares ten years ago for
$20,000, or $200 per share. During the year, the corporation redeemed 10 shares of J’s stock for $30,000. Which
of the following is true?
34. The 100 shares of outstanding stock of Majestic Corporation are owned by Jim and Bob, 40 and 60 share
respectively. Neither shareholder is related to the other. Each has a basis in his stock of $100 per share. During
the year, Jim sold 10 of his shares back to the corporation for $10,000. Assuming the corporation ha substantial
earnings and profits, Jim’s A.G.I, will increase by
35. The 100 shares of outstanding stock of Flash Corporation are owned by Barbara and Kelly, 70 and 30 share
respectively. Neither shareholder is related to the other. Each has a basis in her stock of $200 per share. During
the year, Barbara sold 35 of her shares back to the corporation for $20,000. Assuming the corporation has
substantial earnings and profits, Barbara’s A.G.I, will increase by
36. C, an individual, owns 80 of the 100 shares of T Corporation stock outstanding while the remaining share
are owned by unrelated parties. T’s basis in the 80 shares is $1,600, or $20 per share. This year T redeemed 10
shares of C for $4,000. Assuming the redemption does not qualify for sale treatment and T has substantial E&P,
C’s dividend income and basis in his remaining shares will be
37. If a redemption fails to qualify for sale treatment, the full amount received by the shareholder for the stock
38. In the determination of dividend equivalency, an individual is considered as owning the stock owned by his
or her
39. Which of the following is not a “relative” under the constructive ownership rules?
40. Pennypincher Corporation has 100 shares of stock outstanding owned by the following taxpayers.
Share Shareholder
Owned
Mr. Penny
30
Mrs. Penny (Mr. Penny’s wife)
10
John (the Pennys’ son)
10
Abby (the Pennys’ granddaughter)
10
Buddy Penny (Mr. Penny’s brother)
20
P&P Partnership (Mr. Penny is a 20% partner)
10
PPP Corporation (Mr. Penny is a 40% shareholder)
10
100
None of Mr. Penny’s relatives nor the partnership or corporations are partners in P&P or shareholders in PPP. Under the constructive ownership rules
of 318, what percentage of Pennypincher Corporation does Mr. Penny own?
41. Nickel & Dime Corporation has 100 shares of stock outstanding owned by the following taxpayers.
Share Shareholder
Owned
Mr. Nickel
50
Mrs. Nickel (Mr. Nickel’s wife)
10
Brian (the Nickels’ son)
10
Lisa (the Nickels’ daughter)
10
N&N Partnership (Mr. Nickel is a 20% partner)
10
NNN Corporation (Mr. Nickel is a 60% shareholder)
10
100
Brian Nickel has decided to sell some of his shares back to the corporation in order to pay for his college tuition. Other than Brian’s father, none of
Brian’s relatives nor the partnership or corporations are partners in N&N or shareholders in NNN. Under the constructive ownership rules of § 318,
what percentage of Nickel Corporation does Brian Nickel own?
42. The 100 shares of Yankee Corporation were owned as shown below:
Shareholder
Share
George
10
Bucky
20
G&D Partnership
40
Stein Corporation
30
George and Bucky are unrelated. George is a 50 percent partner in the G&D partnership. In addition, George owns 70 percent of Stein Corporation.
Stein Corporation plans to redeem some of its stock in Yankee. What is Stein Corporation’s direct and indirect interest in Yankee before the
redemption?
43. R, an individual, owns 50 percent of the stock of P Corporation and 30 percent of the stock of Corporation.
The remaining 70 percent of Y’s stock is owned by P Corporation. Because of his stock ownership in P, R is
considered as owning
44. In which of the following situations would the redemption most likely be treated as a sale under the
subjective dividend equivalency test of § 302(b)(1)?
45. SOS Corporation has 200 shares of outstanding stock (one class of voting common), which are owned b
three unrelated individuals as follows: A owns 120 shares, B owns 60 shares, and C owns 20 shares. During the
year, SOS has redeemed a portion of A’s shares for $20,000. In order for the redemption to qualify for sale
treatment the lowest number of shares that SOS must redeem must exceed
46. B, his wife W, and his two sons, G and H, own all of the stock of C Corporation equally. B is planning to
sell all of his stock to C but only if he can secure exchange treatment. Which of the following may occur
without jeopardizing B’s goal?
1. B will step down from his position of chief executive officer but will continue to be a member of the board of
directors of C after the redemption.
2. W will take B’s place as CEO and continue her stake (25% stock ownership) in C which she received from B
as a gift seven years ago.
3. B will exchange his stock for a $100,000 note payable over 20 years bearing 10 percent interest.
4. G has no children and has willed all of his stock to his father.
47. SSS Corporation has 200 shares of outstanding stock, which are owned by three unrelated individuals a
follows: A owns 120 shares, B owns 60 shares, and C owns 20 shares. During the year SSS redeemed 50
percent of A’s shares for $60,000. SSS had E&P before the redemption of $100,000. The E&P of SSS will
decrease by
48. Zap Corporation has 200 shares of outstanding stock, which are owned by three unrelated individuals a
follows: Q owns 120 shares, R owns 60 shares, and S owns 20 shares. During the year, Zap redeemed 30 share
from Q for $36,000. Zap had E&P before the redemption of $35,000. The E&P of Zap will decrease by
49. During the year, Oak Corporation distributed land worth $100,000 (basis $20,000) to one of its
shareholders, T. The corporation will recognize gain if the distribution
50. During the year, Maple Corporation distributed land worth $10,000 (basis $15,000) to one of it
shareholders, R. The corporation will recognize loss if the distribution
51. During the year, Hickory Corporation distributed land worth $40,000 (basis $7,000) and equipment wort
$10,000 (basis $15,000) to one of its shareholders, R. Due to the distributions, the corporation will report
52. Grains Galore, Inc. has manufactured cereals and granola bars for 15 years. The corporation has decided t
terminate the granola bar business and concentrate on cereals. The primary assets of the granola bar business are
shown below.
Adjusted
Fair
Market
Assets
Basis
Value
Manufacturing facility
$50,000
$30,000
Equipment
60,000
$25,000
Other fixtures
$15,000
$12,000
The Great K Corporation has indicated an interest in acquiring the assets shown above. Grains is entertaining the following plans:
1. Sell all of the assets to K and distribute the sales proceeds to its shareholders in a transaction qualifying as a partial liquidation.
2. Distribute all of the assets to the shareholders in exchange for their stock in a transaction qualifying as a partial liquidation. The shareholders will
subsequently sell the assets to K.
From a tax perspective,
53. Which of the following redemptions normally will not qualify for sale treatment?
54. Technically, § 302(b)(4) grants sale treatment only when the redemption distribution is to a noncorporate
shareholder and is in partial liquidation of the distributing corporation. A distribution is likely to b considered in
partial liquidation if
55. TU Unlimited, Inc. has been in the hot tub and spa business since 1970. Several years ago it decided i
should get into the patio enclosure business because many customers were purchasing tubs and the enclosing
them on their patio. Three years ago, the company acquired the franchise from a local proprietor for $100,000 to
allow it to sell prefabricated enclosures manufactured by another corporation specializing i this type of activity.
The proprietor had six years of experience in the business. The enclosure business ha had incredible growth,
and this year the company decided to get out of the hot tub business. It sold all of the assets of the hot tub
business and distributed the proceeds pro rata to its shareholders in redemption o 5 percent of their stock. The
distribution will
56. For purposes of the dividend equivalency test for partial liquidations, there must be a termination
of “qualified business.” A business is qualified if it satisfies certain conditions. These include which of the
following?
57. Under § 303, concerning redemptions to pay death taxes, which of the following conditions must be
satisfied in order to qualify for sale treatment?
58. J died this year. His sole asset was 80 shares of D Corporation stock, which were worth $800,000 (basis
$200 per share). The remaining 20 shares of the stock were owned by J’s son. In J’s will, he provided that al of
the stock go to his son. Estate taxes were $123,000, and funeral and administrative expenses were $27,000. In
order to pay the death taxes, the corporation redeemed 20 shares of stock from J’s estate for $200,000.
Assuming the corporation has substantial E&P, the estate will report
59. For many years, Howdy and his son, Doody, owned and operated Buffalo Corporation. Howdy owned 1,000
shares of the corporation while the remaining 400 shares outstanding were owned by Doody. Howdy had basis
of $20,000 in the stock before he died. On June 1 of this year, Howdy died. Howdy’s gross estate o $1,500,000
was comprised of various assets, including stock in Buffalo. Deductions for funeral an administrative expenses
were $10,000 and Federal and state death taxes were $200,000. Of the remainder, $100,000 was left as a
charitable contribution to the United Way and the balance, including the stock, was transferred to Howdy’s sole
heir, Doody. In order to pay off the death taxes and other expenses, Howdy’ estate sold some of the stock back
to the corporation. In order for the estate’s exchange to qualify for sale treatment, the lowest value that can be
placed on the estate’s 1,000 shares is
60. For many years, Howdy and his son, Doody, owned and operated Buffalo Corporation. Howdy owned 1,000
shares of the corporation while the remaining 400 shares outstanding were owned by Doody. Howdy had basis
in the stock before he died of $20,000. On June 1 of this year, Howdy died. Howdy’s gross estate o $1,500,000
was comprised of various assets, including stock in Buffalo. Deductions for funeral an administrative expenses
were $10,000 and Federal and state death taxes were $200,000. Of the remainder, $100,000 was left as a
charitable contribution to the United Way and the balance, including the stock, was transferred to Howdy’s sole
heir, Doody. In order to pay off the death taxes and other expenses, Howdy’ estate sold some of the stock back
to the corporation. The maximum amount of stock that the estate ma exchange that would qualify for sale
treatment is
61. For many years, Howdy and his son, Doody, owned and operated Buffalo Corporation. Howdy owned 1,000
shares of the corporation while the remaining 400 shares outstanding were owned by Doody. Howdy had basis
in the stock before he died of $20,000. On June 1 of this year, Howdy died. Howdy’s gross estate o $1,500,000
was comprised of various assets, including stock in Buffalo. Deductions for funeral an administrative expenses
were $10,000 and Federal and state death taxes were $200,000. Of the remainder, $100,000 was left as a
charitable contribution to the United Way and the balance, including the stock, was transferred to Howdy’s sole
heir, Doody. In order to pay off the death taxes and other expenses, Howdy’ estate sold some of the stock back
to the corporation. If the corporation distributed property in exchange for the estate’s shares:
62. Mr. R owns 60 of the 100 outstanding shares of B Corporation while the remaining shares are owned b
unrelated parties. He also owns 80 of the 100 outstanding shares of S Corporation. During the year, R sol 40
shares of B to S for $30,000. In applying the rules governing redemptions through related corporations, the
critical pre- and post-redemption ownership interests are:
63. According to brother-sister redemption rules,
64. T owns all of the stock of both B and S Corporations. T, desiring to bail E&P out of B Corporation, sol
stock of B with a basis of $16,000 to S for $50,000. Unfortunately, the sale did not qualify for sale treatment
due to the special provisions of § 304 concerning redemptions by related corporations. Assuming B has E& of
$40,000 and S has a deficit in E&P of ($25,000), T will report a dividend of
65. TH Inc. has been in the storage business for 10 years. Prior to a stock redemption, TH has 100 shares o
stock outstanding. The stock owned and the number of shares redeemed from each shareholder are a follows:
Shares Owned
Adjusted
Name
before Redemption
Basis
L
3
$4,000
E
12
3,000
D
60
6,000
G
5
1,000
MMM Corp.
20
2,000
100
L is E’s mother and D owns 40 percent of MMM Corp; otherwise the parties are unrelated. TH has $100,000 in accumulated and current earnings and
profits. All of the parties have owned their stock since the inception of the corporation. During the year TH redeemed 25 shares of D’s stock for
$30,000. D’s gain is
66. TH Inc. has been in the storage business for 10 years. Prior to a stock redemption, TH has 100 shares o
stock outstanding. The stock owned and the number of shares redeemed from each shareholder are a follows:
Shares Owned
Adjusted
Name
before Redemption
Basis
L
3
$4,000
E
12
3,000
D
60
6,000
G
5
1,000
MMM Corp.
20
2,000
100
L is E’s mother and D owns 40 percent of MMM Corp; otherwise the parties are unrelated. TH has $100,000 in accumulated and current earnings and
profits. All of the parties have owned their stock since the inception of the corporation. Assuming that TH redeemed all of G’s stock for $8,000, its
E&P will
67. TH Inc. has been in the storage business for 10 years. Prior to a stock redemption, TH has 100 shares o
stock outstanding. The stock owned and the number of shares redeemed from each shareholder are a follows:
Shares Owned
Adjusted
Name
before Redemption
Basis
L
3
$4,000
E
12
3,000
D
60
6,000
G
5
1,000
MMM Corp.
20
2,000
100
L is E’s mother and D owns 40 percent of MMM Corp; otherwise the parties are unrelated. TH has $100,000 in accumulated and current earnings and
profits. All of the parties have owned their stock since the inception of the corporation. Assuming all of L’s stock is redeemed, by using the
mechanical determinations provided by the safe harbor tests, the distribution will not qualify for sale treatment if
68. TH Inc. has been in the storage business for 10 years. Prior to a stock redemption, TH has 100 shares o
stock outstanding. The stock owned and the number of shares redeemed from each shareholder are a follows:
Shares Owned
Adjusted
Name
before Redemption
Basis
L
3
$4,000
E
12
3,000
D
60
6,000
G
5
1,000
MMM Corp.
20
2,000
100
L is E’s mother and D owns 40 percent of MMM Corp; otherwise the parties are unrelated. TH has $100,000 in accumulated and current earnings and
profits. All of the parties have owned their stock since the inception of the corporation. If in an independent transaction TH distributes a warehouse
used in the storage business worth $10,000 (basis $8,000) and land worth $15,000 (basis $20,000) in redemption of stock,
69. Section 306 stock includes
70. In 20X5, R received 20 shares of preferred stock as a distribution with respect to his XYZ common. The
preferred was worth $10,000 and R assigned a basis of $6,000 to it. At the time of distribution, the corporation
had substantial earnings and profits. XYZ redeemed R’s preferred stock for $13,000 this yea when its earnings
and profits were $8,000. R will report
71. On June 1 of this year, R Corporation redeemed 200 of its 1,000 shares of common stock outstanding for
$300,000. R’s E&P immediately before the redemption was $500,000. Due to the redemption, R’s E&P will
decrease by