Cotte Inc. has three shareholders, Phil, Bill, and Hill. Each shareholder owns 100 shares of common
stock. On July 1 of this year, Cotte Inc. redeemed 30 shares from each shareholder. In return, each shareholder
received $10,000. Phil acquired his shares three years ago and his adjusted basis in his 100 shares
was $3,000 at the time of the redemption. Cotte has $100,000 of accumulated E&P as of the end of the prior year, and anticipates earning a further $20,000 in E&P in the current year.

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