The stock of JDR, Inc. is owned by 3 shareholders, J, D and R. The number of shares and tax basis owned by each shareholder is as follows:
| Number of Shares | Tax Basis | |
| J | 10,000 | $250,000 |
| D | 15,000 | $75,000 |
| R | 15,000 | $125,000 |
JDR is an S corporation, but in prior years, it was a regular corporation. It has E&P from those prior years of $200,000, and AAA from its S corporation years of $300,000. The corporation redeems one-half of R’s shares for $175,000.
a. Assume the redemption is qualified under Code Sec. 302 (i.e., it will be treated for tax purposes as a sale of one-half of R’s shares). How will the redemption affect R for tax purposes? What will be the post-redemption balances in the corporation’s E&P and AAA accounts?
b. What if the redemption does not qualify for sale treatment (i.e., is a “non-qualified” redemption)? The corporation does not elect to treat the distribution as coming from E&P first.
c. Same as b, except the corporation does elect to treat the distribution as coming from E&P first.
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