Abstract For years, considerable controversy has surrounded the interpretation of section 312 (e) of the U. S. corporate law which declares that "in the case of amounts distributed in partial liquidation or in a redemption to which section 302 (a) or 303 applies, the part of such distribution which is properly chargeable to capital account shall not be treated as a distribution of earnings and profits. " The controversy has generally focused on the meaning of the terms "properly chargeable" and the "capital account. " One approach is to reduce the paid-in-capital account by 20, 000 since 20 percent of the shares have been redeemed and earnings and profits are reduced by the balance of the payment, 45, 000. This approach after years of opposition has recently been adopted by the Internal Revenue Service (Service) in Revenue Ruling 79-376. The second approach, and the one formerly advocated by the Service, is to first reduce earnings and profits by 20 percent, i. e. , 30, 000, and then reduce capital by the balance of the payment, 35, 000.
Ford et al. (1981) studied this question.