C and D organized Z Corporation 10 years ago, each distributing $40,000 and each
ID: 2452728 • Letter: C
Question
C and D organized Z Corporation 10 years ago, each distributing $40,000 and each receiving 400 shares of common stock. Five years ago, in June, Z declared a one dividend payable in pure preferred with a $400 fair market value. The value of the common stock after the distribution was $1,600 per share. In that year, fiver years ago, Z had accumulated E&P of $52,000 and current of $12,000. In the current year, Z has accumulted E&P of $112,000 and current E&P of $8,000. In December of the current year, C sells all of his preferred stock to E for $36,000. In June of that same year, C had previously sold all of his common stock to F for $200,000. E is C's son.
a There is a complete termination of C's interest so that the preferred stock is expected from the 306 rules.
b The 306 rules apply to C's sale of the preferred. Of the $36,000 sale price, $32,000 is treated as ordinary income.
c 306 applies to C's sale of the preferred. All $36,000 is treated as ordinary income.
d None of the above
Which is the right answer and why?
Explanation / Answer
D) None of the above because The amount realized shall be treated as ordinary income.
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