McGraw-Hill's Taxation of Business Entities 3rd Edition by Connie Weaver, Brian Spilker, Edmund Outslay, John Robinson, Ronald Worsham, Benjamin Ayers, John Barrick

Exercise 67

Spartan Corporation made a distribution of $500,000 to Rusty Cedar in partial liquidation of the company on December 31, 2011. Rusty, an individual, owns 100 percent of Spartan Corporation. The distribution was in exchange for 50 percent of Rusty's stock in the company. At the time of the distribution, the shares had a fair market value of $200 per share. Rusty's income tax basis in the shares was $50 per share. Spartan had total E P of $8,000,000 at the time of the distribution.
a. What is the amount and character (capital gain or dividend) of any income or gain recognized by Rusty as a result of the partial liquidation
b. Assuming Spartan made no other distributions to Rusty during 2011, by what amount does Spartan reduce its total E P as a result of the partial liquidation