Please consider the following, and answer the associated questions.

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 are 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.

1. 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?

2. 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.

3. Now answer the same question as #2, except consider what would happen if the corporation does elect to treat the distribution as coming from E&P first.